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Is a Beat in the Cards for Broadcom (AVGO) in Q4 Earnings?


Broadcom Limited AVGO is set to release fourth-quarter fiscal 2017 results on Dec 4. The company is benefiting from strong demand for Wi-Fi chips and radio frequency solutions from smartphone original equipment manufacturers (OEMs).

Moreover, rapid adoption of connectivity-related products in Internet of Things (IoTs) appliances and automobiles is a growth driver in the soon-to-be-reported quarter.

Broadcom’s extensive product portfolio serves multiple applications within four primary end markets — wired infrastructure, wireless communications, enterprise storage and industrial & others. The company’s focus on multiple target markets and geographies mitigates operating risks and lessens exposure to volatility in any single market.

Notably, the company beat the Zacks Consensus Estimate in all of the trailing four quarters, with an average positive surprise of 4.79%. Last quarter, the company delivered a positive earnings surprise of 1.74%.

Broadcom Limited Price and EPS Surprise

Broadcom Limited Price and EPS Surprise | Broadcom Limited Quote

Broadcom’s shares have returned 53.6% year to date, substantially outperforming the 37.3% rally of the industry. The company completed the long-delayed Brocade acquisition in the quarter, which removes a major overhang from the stock.

Let’s see how things are shaping up for this announcement.

Wired Segment View Dismal

Wired infrastructure segment accounts for almost 50% of total revenues. Last quarter, segment revenues were driven by seasonally strong demand for set-top box products as well as merchant and custom silicon products from datacenters.

However, management expects segment revenues to decline sequentially due to seasonal weakness in demand for the company’s broadband access products.

The Zacks Consensus Estimate for Wired Infrastructure segment revenues are currently pegged at $2.15 billion.

Wireless Benefits From Strong Demand

Wireless Communications comprise roughly 29% of total revenues. Last quarter, the rise in production volumes of the company’s large North American smartphone customer’s (Apple) next-gen platform (iPhone X) drove revenues.

Broadcom expects the higher dollar content in the next-gen platform to drive strong year-over-year and sequential segment revenue growth in the soon-to-be-reported quarter.

The Zacks Consensus Estimate for the Wireless Communications segment revenues are currently pegged at $1.73 billion.

Lower HDD Demand to Hurt Enterprise Storage Sales

Enterprise Storage accounts for almost 17% of total revenues. Last quarter, revenues benefited from strong demand for the company’s Hard Disk Drive (HDD) products, which however, were expected to fall sharply. This will hurt Enterprise Storage revenues in the current quarter.

However, strong growth expectation in the server and storage connectivity business will fully offset the negative impact from HDDs.

The Zacks Consensus Estimate for the Enterprise Storage segment revenues are currently pegged at $670 million.

Earnings Whisper

Broadcom is likely to deliver a positive earnings surprise in fourth-quarter fiscal 2017 due to a favorable combination of Zacks Rank #2 (Buy) and an Earnings ESP of +0.63%.

This is because, per our model, a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

We don’t recommend Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are few stocks you may consider, per our model, which have the right combination of elements to post an earnings beat this quarter.

Arista Networks ANET has an Earnings ESP of +2.13% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Paycom Software PAYC has an Earnings ESP of +6.59% and a Zacks Rank #2.

Micron Technologies MU has an Earnings ESP of +1.42% and a Zacks Rank #3.

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