Avago (AVGO) Shows Promise with Healthy Growth Potential

On Jan 4, Zacks Investment Research updated the research report on analog semiconductor manufacturer Avago Technologies Limited AVGO.

Avago is a leading supplier of analog semiconductors for the wireless communications, wired infrastructure and industrial/auto markets. The company's focus on multiple target markets and geographies mitigates operating risks and lessens the exposure to volatility in any single market.

The Semiconductor Industry serves as a driver, enabler and indicator of technological progress. The Internet of Things is creating newer avenues and is largely believed to be the next semiconductor growth opportunity with the potential for billions of connected devices. Several original equipment manufacturers (OEMs) are adopting high-speed 3G and 4G technologies for connecting tablets, eReaders, machine-to-machine communication devices and gaming devices. Over the years, Avago has established strong relationships with leading OEMs across multiple target markets. These have helped Avago to gain key insight into customers to be more efficient and productive and better serve its target markets and customers.

In addition, Avago maintains an efficient global supply chain with a variable, low-cost operating model. The company outsources a majority of its manufacturing operations as well as some of its corporate infrastructure functions. Avago also aims to minimize capital expenditures by focusing on internal manufacturing capacities, leveraging innovative materials and processes to protect intellectual property rights while outsourcing standard complementary metal oxide semiconductor (CMOS) processes. These enable the company to maintain sustainable revenue growth and expand margins.

Acquisitions, over time, have been Avago's most favored mode for penetrating unexplored markets. Avago has entered into an agreement to acquire Broadcom Corp. BRCM for a total consideration of $37 billion. The deal is arguably the largest of its kind in the semiconductor chip industry and would create a behemoth with one of the most diversified communications platforms in the semiconductor industry at combined annual revenues of approximately $15 billion. Synergistic benefits from the merger is likely to increase profitability through economies of scale and mutual sharing of manufacturing expertise, research and development costs and adjustment of staffing expenses. The transaction will likely result in $750 million of annual cost synergies within the first 18 months of operation and is expected to be immediately accretive to non-GAAP earnings and free cash flow.

The strategic purchase gives us enough confidence to remain bullish on this Zacks Rank #2 (Buy) stock. A couple of other notable companies in the industry include Advanced Micro Devices, Inc. AMD and Applied Micro Circuits Corporation AMCC, both carrying the same Zacks Rank as Avago.

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