RBC Capital Raises Avago (AVGO) PT After Solid Quarterly Report
RBC Capital analyst, Amit Daryanani, believes Avago Technologies (NASDAQ: AVGO) is executing well on its cost takeout targets with LSI and ELX assets and more material upside likely in CY16 once BRCM acquisition closes. The price target increases to $155 from $150 with the estimate increase.
AVGO reported results that were above expectations with revenues/EPS of $1.85B/$2.51 vs. Street at $1.85B/$2.38. Revenue upside was driven by strong growth in enterprise storage segment, and stable performance from wireless, wired, and industrial segments.Gross margins in the quarter came in at 62.0% vs. Street at 60.4%, due to better revenue mix and higher utilization. Operating margins were 43.8% vs. Street at 42.3%.
The ~6% q/q growth in Oct-qtr was led by 10% q/ q growth in Wireless Communications (37% of sales) driven by a seasonal ramp at Apple. The Enterprise Storage segment also increased 9% q/q (35% of sales) above expectations calling for low-to-mid single digit q/q improvements. Wired infrastructure (20%) was increased 2% q/q and is expected to be up slightly q/q. Finally, Industrial was down -10% q/q, more than expected, and was guided down low-single digits in the Jan-qtr.
Guidance was mixed with Jan-qtr revenue guide modestly below expectations as the wireless business is expected to decline low-teens q/ q due to seasonal patterns. Positively, Jan-qtr EPS guide is ahead of the street due to lower OpEx and higher gross margin trends.
Avago’s Wireless segment (39% of revenues in FY14) remains a growth engine, and the segment should materially outgrow the broader industry as the need for high-performance filters only magnifies in 4G and LTE environments, which must possess the ability to process multiple frequencies and the subsequent need for more complex filters.
The Broadcom acquisition should be accretive to Avago’s EPS, as there is upside to its $750M cost-synergy target. Broadcom could contribute $2.50–3.00 to Avago's EPS in CY18E, when the $750M in run-rate synergies are fully achieved, resulting in 20–30% accretion to current EPS estimates.
Estimates increase with guidance as Jan-qtr estimates increase to $1.78B/$2.35 and FY16E estimates go to $7.32B/$9.62, implying 6%/7% y/ y sales/EPS growth. FY17E revenue/EPS goes to $7.87B/$10.35, which assumes 7%/8% sales/EPS growth. The increase in estimated drives an increase in the price target to $155 from $150.
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Shares of Avago Technologies closed at $132.21 yesterday.