Coverage Initiated On AVGO At Neutral

Avago Technologies

is having coverage initiated at Neutral by JP Morgan, which states that the company has transitioned from a commodity supplier to proprietary products, believing that the stock is fully valued. In the report, JP Morgan writes "Avago's revenue from proprietary products has risen from roughly 25% of sales in F06 to 45% of sales in F10E, primarily via growth in the company's wireless and industrial/auto products (combined 69% of F3Q10 revenue). We estimate gross margins for proprietary products are 52%, 400 basis points above the corporate average margin of 48%. We are concerned Avago's margins could decline sharply during a downturn as commodity products (55% of F10E sales) typically have more downside than proprietary products due to more price volatility and lower barriers to entry. We would note Avago's gross margins declined by almost 900 basis points from 38.9% in F1Q09 to 30.2% in F2Q09 during the previous downturn." JP Morgan maintains its Neutral rating and $22 price target. Avago Technologies closed Friday at $24.68.