MKM Partners Lifts PT on Avago (AVGO) to $160; No Other Suitors for Broadcom (BRCM) Expected

MKM Partners boosts its price target on Avago Technologies Limited (Nasdaq: AVGO) from $149 to $160 following Broadcom (Nasdaq: BRCM) deal and Q1 results.

Analyst Ian Ing commented, We think this large strategic deal accelerates the takeout of fabless networking/comms equipment plays like Altera (Nasdaq: ALTR), Xilinx (Nasdaq: XLNX), and Cavium (Nasdaq: CAVM), as we believe they are attractive to the major acquirers for different reasons.

On the Broadcom deal, Ing said, We model BRCM contributing $3.72 of long-term accretion in a 2-3 year time frame, using the L-T target model metrics but conservatively assuming no growth from nearterm BRCM revenues. This suggests a takeout at ~16x L-T earnings, or slightly below the NTM S&P multiple of 17x ... We don't expect any other suitors for BRCM, as others are unlikely to rival the earnings leverage obtained by AVGO's "large efficient" model via lean operating expenses, low tax rate, and relatively low share count.

Ing concludes: Given AVGO's track record of successful integration, we are confident in the company's ability to reach its long term operating targets, and think that BRCM synergy and accretion estimates will likely prove conservative.

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