What happened
Broadcom (AVGO +4.74%) reported a sizable earnings beat Thursday night, sending shares of the semiconductor company higher in Friday trading. Instead of the $9.56 per share in pro forma profits that Wall Street expected, Broadcom reported $9.73 for its fiscal third quarter of 2022 -- and sales exceeded expectations as well, coming in at $8.5 billion instead of the Street's expected $8.4 billion.
As of noon ET, Broadcom stock is up 4.7%.
NASDAQ: AVGO
Key Data Points
So what
Broadcom's sales were up 25% year over year, and its quarterly earnings grew 70% to $7.15 per share under generally accepted accounting principles (GAAP). But the news was actually even better than that.
With minimal capital spending in the quarter, Broadcom noted that its free cash flow amounted to $4.3 billion -- 51% of the company's revenue, and 40% above reported net income. According to data from S&P Global Market Intelligence, Broadcom has now generated positive free cash flow of $15.3 billion over its last four reported quarters -- more than half again what the company reported as net income, and at a market capitalization of just under $200 billion, this means that Broadcom stock costs barely 13 times free cash flow.
Now what
Now, is that a good price, or a bad price?
From where I sit, it's a very good price. According to analysts, Broadcom is likely to grow its earnings at better than 15% annually over the next five years. The company also pays a 3.3% dividend yield and, when you add those two numbers up and divide them into the stock's 13 times free cash flow (to get something called a total return ratio), the result is a very attractive 0.7.
Granted, this formula only works if Broadcom succeeds in growing as fast as analysts predict it will. But with management forecasting that sales in the fourth quarter will keep growing -- up 20% year over year at about $8.9 billion -- Broadcom still looks to be on the right track to me. Investors who are buying Broadcom today might even want to buy it more enthusiastically after they get a look at these numbers.
