For investors looking to balance the search for high-growth companies with a careful view on price, the "Growth at a Reasonable Price" (GARP) method provides a useful framework. This approach seeks to find companies with strong and lasting growth paths that are not completely shown in their current stock prices, steering clear of both highly overvalued trends and very cheap value stocks. One use of this method is the "Affordable Growth" filter, which looks for stocks with a high growth score (above 7 out of 10), good profit and financial strength, and a price score that implies the market is not overestimating them (above 5). This process sorts for chances where good basics meet a fair price. A present example from this filter is Broadcom Inc (NASDAQ:AVGO).
A Look at a Technology Leader
Broadcom Inc. is a worldwide technology company that works through two main parts: semiconductor solutions and infrastructure software. Its semiconductor group contains many products needed for data centers, networking, broadband, wireless, and industrial uses. Its infrastructure software business gives important solutions for mainframe, distributed systems, and cybersecurity. This two-part model, joining hardware and software, places Broadcom in a central role in the current digital shift in businesses and cloud systems. The company's recent purchase of VMware further strengthens its position as a key provider of software that supports hybrid and multi-cloud settings.
Strong Growth Path
The base of any GARP investment is clear and expected growth, and Broadcom does very well here, getting a top Growth Score of 10. The company is not only growing, it is speeding up.
- Past Results: Over the last year, Broadcom posted strong growth with Revenue rising by 23.87% and Earnings Per Share (EPS) jumping by 40.47%. The longer-term pattern is also solid, with an average yearly EPS growth of 25.23% and Revenue growth of 21.74% over recent years.
- Future Predictions: The growth is forecast to keep going. Analyst projections suggest an average yearly EPS growth of 28.32% and a notable Revenue growth of 29.08% in the next years. Importantly, the expected revenue growth rate is a speed increase from the already good past rate.
This mix of excellent past performance and a faster future view is exactly what growth-focused investors want. It shows a company that is effectively growing its operations and taking market share.
Price Considerations
A growth score of 10 would usually come with a high price, but the Affordable Growth filter needs the price to stay fair. Broadcom's Price Score of 5 shows a varied situation that needs understanding, which is key to GARP review.
- Basic Ratios: At first look, a Price-to-Earnings (P/E) ratio of 48.58 and a Forward P/E of 32.13 seem high, particularly next to wider S&P 500 averages.
- Comparative and Growth-Related View: The price view gets more detailed on further look:
- Industry Look: Compared to similar companies in the Semiconductors & Semiconductor Equipment industry, Broadcom's price is actually in line. Its P/E ratio is lower than 65% of the industry, and its Forward P/E is lower than 68% of peers.
- Growth Adjustment: The main number for GARP investors is the PEG ratio, which changes the P/E for predicted earnings growth. Broadcom's low PEG ratio suggests its current price may be fair when its very good growth rate is considered.
- Profit Reason: The report states that Broadcom's "excellent profit score may support a higher PE ratio." This is a vital connection in the GARP idea, paying a higher price is more acceptable when the company creates very good returns on capital.
Supporting Basics: Profit and Strength
For growth to be lasting and worthwhile, it must be supported by good profit and a stable financial setup. This is why the Affordable Growth filter includes scores for these areas.
Profit is Broadcom's clear strong point, with a near-top score of 9. The company works with industry-best margins:
- A Gross Margin of 67.89% (higher than 91% of peers).
- An Operating Margin of 40.94% (higher than 96% of peers).
- A Profit Margin of 36.20% (higher than 95% of peers). These very good margins show price strength, operational effectiveness, and a good move to a higher-margin software business, providing the cash to support more growth and new ideas.
Financial Strength gets a medium score of 5. The review shows a generally stable but mixed picture:
- Positives: The company has a very strong Altman-Z score, pointing to low bankruptcy risk, and a good Debt-to-Free-Cash-Flow ratio of 2.42, showing it can reduce debt fast with its cash creation.
- Points to Note: The main comments are a Debt-to-Equity ratio that is higher than many industry peers and liquidity ratios (Current and Quick Ratio) that are below industry averages. However, the report adds perspective by saying the company has "very limited total debt," implying the balance sheet is workable given its large cash flow.
Summary and Next Steps
Broadcom Inc. offers a useful example for the Growth at a Reasonable Price method. It has the fast, high-quality growth that growth investors want, shown by its top 10 score and speeding revenue forecasts. Importantly for the "affordable" or "reasonable price" part, its price, while high in basic terms, seems supported and even relatively good when compared to its peer group and, most significantly, its growth outlook. This is joined by top-level profit that pays for its plans and a financial strength position that, while needing attention, is seen as stable.
For investors wanting to see other companies that fit similar needs of solid growth, acceptable basics, and fair price, more results can be seen using the Affordable Growth stock filter.
A full list of all the basic points talked about is in the complete ChartMill Fundamental Analysis Report for AVGO.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. Investing has risk, including the possible loss of the amount invested. Readers should do their own study and talk with a qualified financial advisor before making any investment choices.
