Why Broadcom Shares Bounced Higher Today

Is Broadcom's jump meaningful or just another movement?

Jun 2, 2014 at 2:00PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Broadcom (NASDAQ:BRCM) jumped more than 13% Monday after the company raised its second-quarter margin guidance and announced it will explore strategic alternatives for its cellular baseband business.

So what: Broadcom has enlisted the help of JPMorgan Chase in its efforts to either sell or wind down the segment. Excluding the cost of any impairment or restructuring charges, such a move would result in a roughly $700 million reduction in annualized expenses on a generally accepted accounting principles basis. Adjusted for stock-based compensation, Broadcom's non-GAAP research and development and selling, general, and administrative expenses would be reduced by roughly $600 million.

Broadcom also said it plans to organically reinvest about $50 million of its newfound savings annually into projects in its broadband, infrastructure, and connectivity businesses.

Finally, Broadcom still expects second-quarter revenue between $2 billion and $2.1 billion, but now sees product gross margin coming in "at or above the high end of the previously guidance range, driven principally by mix." The company previously told investors to expect second-quarter GAAP and non-GAAP gross margin to rise by 100 to 200 basis points and 75 to 175 basis points, respectively, from the first quarter.

Now what: Broadcom would obviously rather find a buyer than simply wind down the cellular baseband segment. In any case, lengthy product development and sales cycles for LTE products in the business have been a drag on its operating results, and competition in the space is only becoming more fierce. In the end, with shares trading around 13 times next year's estimated earnings -- and keeping in mind those estimates are likely to climb from here -- I think investors are right to bid up Broadcom stock today.

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Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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