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March 6, 2000
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BRCM vs. CNXT
As part of my ongoing portfolio review, I decided to take another look at CNXT, to see whether I still feel that BRCM significantly outshines its nearest competitor. My conclusion is, yes, BRCM is still a better company than CNXT. My admittedly superficial rationale is below. I thought that the following points could form an interesting discussion/thread. I would especially be interested in hearing anyone's supplements or corrections, especially CNXT longs. Here goes:
Significant edge to CNXT, which has a YPEG of 2.21 vs. BRCM's YPEG of 5.35 (calculated using figures from the Fool's Estimates page).
Thus, BRCM is trading at a huge multiple (over twice the YPEG) to that of CNXT. This is something for bargain hunters to consider. However, I often see a lower valuation assigned to a competitor as a sign that the competitor is not viewed very strongly by the market. In many cases, there are good reasons why a competitor is assigned a lower multiple.
Edge to BRCM. A lot of what I've read indicates that BRCM's products are often technologically superior to competitive products of CNXT. This would include cable modems and set-top boxes, an area where BRCM has (I believe) 80% market share, while CNXT has experienced trouble obtaining DOCSIS certification of its products.
In DSL, BRCM and CNXT are neck-and-neck for the lower end (ADSL?) but BRCM is far ahead in the next-generation DSL technology (VDSL?). Plus, BRCM leads in integrating a lot of different features on its chips, such as networking, voice over IP, etc.. A lot of you techies and others are a lot more knowledgeable in this area, so please feel free to post away.
Edge to BRCM. BRCM has significantly higher margins (gross and net) and year-over-year revenue and earnings growth than CNXT.
BRCM is fabless while CNXT manufactures about 50% of its products in-house. There's been a lot of recent discussion on this issue, which I won't rehash. Suffice it to say, the fabless model gives you higher margins, so I prefer it.
CNXT does not appear to be nearly as focused in terms of its product line as BRCM. CNXT has, I believe, five different business divisions which cover a large spectrum of products (analog/dial-up modems, wireless products, cable modems, DSL, networking products). CNXT has had trouble in integrating technologies from these various divisions, from what I've read. While BRCM has a wide range of products as well (cable modems/set top boxes, home networking, satellite broadband, and DSL), these products all fit into a logical framework of the "edge of the network" where a user (or more specifically, a user's appliance) interfaces with a broadband network.
Edge to BRCM. Henry Nicholas seems awfully competitive and driven. While I probably wouldn't want to work for a slave driver like Nick, I have to admit I don't mind him running a company of which I am part owner (all right, very small part-owner :-) ).
Dwight Decker, on the other hand, has astounded me with some surprisingly inappropriate comments. First, there was the QCOM fiasco, when he recently dissed the royalty structure of QCOM, an important customer. Two days later, QCOM announced it was replacing CNXT with RFMD for an important wireless component. While it's possible that Decker already knew the news when he made the comment, it still appears silly to bad-mouth a past customer and potential future customer.
Plus, there seems to be an unwritten policy that CNXT employees can insult BRCM, and especially Henry Nicholas. I've read several articles where CNXT employees refer to him "off the record" as satanic, or some such nonsense. While I'm all for strong competition, this sophomoric posturing doesn't seem to reflect well on CNXT, and I don't know why CNXT management doesn't put a stop to it.
Another possible problem is that CNXT is a spinoff of a much larger company, Rockwell international. Unlike BRCM, which started from nothing, one could argue that CNXT may still suffer the complacency of a larger, more entrenched company. Hard to say. Texas Instruments is an old-line company that seems to be doing a great job reinventing itself. However, I still think that this creates a disadvantage to CNXT versus the young and scrappy BRCM.
Here's a dated, but still entertaining, Forbes article regarding the two companies. It might be a helpful start for new BRCM investors.
A lot of hearsay, superficial analysis and tech-illiterate babble, but at least it's a start. Anyone want to comment/elaborate/criticize the above points?
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