January 13, 2016

For Broadcom, As-Reported ROA And P/E Metrics Severely Miscommunicate Its Real Profitability And Valuation


Summary

  • After adjusting for distortions in GAAP earnings and assets, BRCM shows an adjusted P/E of 15.8x, significantly lower than the firm’s as-reported P/E of 20.2x and the U.S. corporate average.
  • Using adjusted earnings, the company’s adjusted return on assets (ROA’) is 18% to 19% in 2014 and 2015, three times the 6-7% level that most financial databases currently report.
  • BRCM reported $1.93bn in 2014 when, in economic reality, its adjusted operating cash flows were nearly double at $3.77bn.

BRCM PVP

Performance and Valuation Primeā„¢ Chart

For Broadcom, there are many failures of GAAP that lead to a low-quality earnings number and an unreliable balance sheet. One major issue is the failure to consistently require capitalization of research and development expenses. The natural “lumpiness” of the roughly $2.4bn expenditure results in earnings, margins, cash flow from operations, and return on assets that can fluctuate up and down materially from year to year, unlike economic reality.

GAAP requires R&D costs to be either expensed, or capitalized from acquisitions as in-process, or written off later. The goodwill and intangibles from acquisitions compound the issues when research and development expenditures are involved. For Broadcom, goodwill in the $3bn to $4bn range and intangible assets ranging from $600mn to +$2bn also create material inconsistencies.


Click here to read the article in its entirety at Seeking Alpha.