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Technology Stocks : Broadcom (BRCM) -- Ignore unavailable to you. Want to Upgrade?

To: Stoctrash who wrote (2327)	7/23/1999 1:13:00 PM
From: Keith A Walker	Read Replies (2) \| Respond to of 6531

FredE, I am hoping the move up today isn't just a head-fake. Overall, I am still bullish and taking on more long positions on the dips. A close above 126 would certainly bolster confidence that we have seen the worst of the selling/profit-taking. P.S. I had to correct a statement from John Westergaard yesterday. He had put out an e-mail indicating that BRCM was losing money. To his credit, he corrects his error: ------------------------------------------------------------------ ** WBN Mailbag: A Reader Asks (taken from 7/23/99 WBN e-mail) Dear John: The statement yesterday about Broadcom (BRCM 122 Nsdq) is erroneous. The Company is profitable (earnings were released yesterday $0.19/share). Please check your facts. In my opinion, Broadcom will become the next "Intel" of the bandwidth semi's, and Intel needs to watch out even though they acquired Level One (competitor to Broadcom). Note: The writer may actually know what he's talking about. He's a "Patent Intelligence Analyst" with a world class high tech company!!! Sir, Patent Intelligence Analyst: Hey, wow, leapin' butterballs. You're right. I blew that one. Kessler refers to an "implied" p/e and "implied" growth and I implied that "implied" meant not real. Here's a recent description of the Company: "Broadcom Corp. is a developer of highly integrated silicon solutions that enable broadband digital data transmissions to the home and within the business enterprise. BRCM's products enable the high-speed transmission of data over existing communications infrastructures. For the three months ended 3/99, revenues rose from $35.3 million to $96.3 million. Net income totalled $19.3 million, up from $7.7 million. Results reflect increased volume shipments of ICs and high-speed networking." As for Andy Kessler of "Velocity Capital" who we characterize as the "Ben Graham of new paradigm high tech investment theory", here are the paragraphs from his "New Investing Math" which I misinterpreted: "The New Investing Math: Let's do some (easy) math. If you take a stock's price-to-sales ratio and divide it by the company's after-tax profit margin (earnings to sales), you get the price-to-earnings ratio. If you assume that in today's market, a normal P/E is one times the growth rate (a big assumption, but not a bad one), then you can substitute the growth rate for the P/E. If you know, or can estimate, any two of the above, you can figure out what value the market is placing on the third. "Many Internet companies are losing money, so margins are negative, but in many cases the losses are discretionary, so they are nowhere near their "model earnings." But you can make some assumptions, based on the business model, of just what kind of margins the company will eventually have -- and that is what I believe the market is doing today. "Here are some interesting examples: Broadcom (BRCM:Nasdaq), whose revenue is running at about $400 million annually, sports a $10 billion market cap and thus is valued at 25 times sales. Long term, the company should be able to make 20% after taxes, so its implied P/E is 125 (25 divided by 0.20) and therefore its implied growth rate is 125%. Because the company is currently growing faster than that, it can be considered reasonably priced." WESTERGAARD: Ben Graham is widely credited as the father of modern security analysis (as contrasted, I suppose, to the "ancient" version). Mr. Kessler, it strikes us, is also breaking new ground which is how we come to think of him as the "Ben Graham of New Investing Math", or some such!!! In the preceding paragraph, Mr. Kessler is saying that since the Company is valued at 25x sales and he believes it can earn 20% after tax, its appropriate p/e is 125x (25x sales divided by the 20% after tax assumed rate of profit). Now, the actual estimated p/e is 179x for FYDec99 (i.e. consensus estimate of $0.68 divided into 122 which was last night's close). It seems to me, then, that the stock is a bit stretched unless it can be expected to grow at 179% or better for the foreseeable future which is hard to imagine, particularly earnings this calendar year are predicted to grow only 42% to a consensus $0.68 versus $0.48 last year. If you accept Kessler's thesis that a stock should sell at one times the growth rate, you would have to conclude that it is overpriced by a factor of 300% which is to say that a proper valuation would be more like $29 per share than last night's close at 122. And keep in mind that this valuation model starts with the assumption that 25x sales is a reasonable valuation to begin with. The real Ben Graham would definitely not have been comfortable with that. Hmmm€.. Boy, wow, leapin' butterballs -- that sure is "New Math"!!! Amazing, amazing.