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Tuesday, August 15, 2006

Broadcom Gets An Upgrade BRCM

Caris & Company was good enough to recently upgrade Broadcom from “above average” to “buy”. The company said that it would take a charge of over $700 million to earnings, but now that the issue appears to be moving behind that company its share rebounded a tiny bit from just below $22 a few weeks ago to over $26. They are down $50 since March.

Do the shares deserve to move up further, of is the upgrade a cruel trap? From 2003 to 2004, Broadcom grew like a weed. Revenue moved from $1.61 billion to $2.4 billion. Operating income rose from a deficit of over $900 million to plus of $272 million. But, then the world stood still. Revenue in 2005 was only $2.67 billion. And then the restatements, late filings and suspension of the company’s buyback program all hit the news. But earning looked like they were accelerating again when the company put out its partial numbers on July 19. Revenue for Q2 2006 was $941 million up nearly 56% over $605 million in the same period a year ago.

The late filings could cause Nasdaq listings problems, but that remains to be seen. The big issue with Broadcom was that it forecast revenue for Q3 to be only in the $900 million range. The projection for Q4 was $941 million, another disappointment.

In an interview with the Associated Press, Kaufmann Bros. analyst Shebly Seyrafi voice his reservations about the company’s outlook: "It's concerning because they noted inventory builds in several segments," Seyrafi said. "It's pretty broad-based. It introduces risk to their outlook, and for the semiconductor industry as a whole, rising inventory is concerning as well."

Broadcom may get back on track, but with slowing revenue growth and unknown risks about its delayed earnings filings with the SEC, it is too early to look at the stock as a “buy” even at this low price. It is not a bargain yet.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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