The equity markets have held up quite well, given the fallout from the chaotic pullout of American troops from Afghanistan, the devastation inflicted by Hurricane Ida and the continued surge in coronavirus cases, asserts Jason Clark, value investor and contributing editor to The Prudent Speculator.
There is no guarantee that investors will continue to maintain their faith in equities as we go forward, and we concede that September has not been a great month over the last 93 years — but stocks have been climbing a Wall of Worry, comprised of arguably more troublesome bricks than what we are seeing today, since the end of the Great Financial Crisis.
Meanwhile, here is a review of two of our portfolio companies — both technology firms — that recently announced quarterly earnings.
Broadcom (AVGO) reported fiscal Q3-estimate-beating financial release. The semiconductor giant earned an adjusted $6.96 per share, versus the analyst consensus of $6.85.
Revenue was $6.78 billion, compared to the projection of $6.76 billion. Revenue rose 16% year-over-year, with Semiconductor Solutions up 20% and Infrastructure Software climbing a more modest 4%.
AVGO benefitted from growth in its 5G infrastructure, broadband and wireless businesses and expects the momentum to carry into the fourth quarter.
For upcoming quarter, AVGO expects revenue around $7.35 billion and adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and non-cash charges) around 61% of revenue.
CEO Hock Tan commented, “In Q3, demand continued to be strong from hyper cloud and service provider customers. Wireless, continuing to have a strong year-on-year compare and while enterprise has been on the trajectory of recovery, we believe Q3 is still early in that cycle and then enterprise was down year-on-year. On the supply side, we continue to keep our lead times stable.”
Broadcom is ruthless when it comes to cost discipline, and we think the valuation metrics remain inexpensive, including a forward P/E around 16 and a free cash flow yield near 7%.
We see continued strength in free-cash-flow generation, which should be used to further pay down debt and to look for strategic deals. AVGO also sports a very generous dividend yield of 2.9%. Our Target Price for AVGO has been boosted to $544.
Hewlett Packard Enterprise (HPE) recently reported fiscal Q3 2021 earnings per share of $0.47 (vs. $0.42 est.) and revenue of $6.90 billion (vs. $6.93 billion est.).
The information technology solutions company offered guidance that was below consensus estimates. HPE expects $0.44 to $0.52 in adjusted EPS next quarter, compared to the analyst estimate range of $0.45 to $0.54.
For the full year, adjusted EPS should come in between $1.88 and $1.96 (estimate range $1.85 to $1.95), while free cash flow should be between $1.5 billion and $1.7 billion.
“We delivered a very impressive Q3 performance, marked by strong order growth, expanded margins and record free cash flow,” said CEO Antonio Neri.
“We are once again raising our full-year guidance to reflect the continued momentum in the demand environment and our strong execution,” added CFO Tarek Robbiati. “This marks the fourth increase in our outlook since our Securities Analyst Meeting in October 2020.”
HPE said it will pay the regular cash dividend of $0.12 on October 6 and is targeting $250 million of share repurchases in Q4. While overall revenue growth of 3% sequentially was a little bit below what we had expected, we continue to think HPE is heading in the right direction.
True, the company is heavily dependent on corporate and government spending, which can change quickly in this environment; however, we think the long-term demand in 5G networking and subscription revenue growth potential will remain strong.
Shares yield 3.1% and the forward P/E is around 8, a figure substantially lower than the rest of the tech sector. Shares have gained more than 30% this year and our Target Price has been bumped up to $20.
