After Cobham Deal, Viavi Solutions Has Further M&A Opportunity, Analyst Says

Viavi Solutions Inc VIAV shares rose 15.3 percent Friday following the announcement that it would buy COBHAM CBHMF's AvComm and wireless test and measurement businesses for $455 million in cash.

The Analyst

Loop Capital Markets analyst James Kisner upgraded shares of Viavi from Hold to Buy and increased the price target from $9.50 to $11.

The Thesis

Viavi's fundamentals are improving, as shown in its better-than-expected second-quarter earnings report Feb. 1, Kisner said in a Monday note. 

The network enablement business, which accounts for about 60 percent of the company's sales, outperformed in the December quarter and was helped by DOCSIS 3.1 deployments at cable operators the analyst said. 

The deployment of G.fast DSL technology could further benefit Viavi later in the year, Kisner said. Viavi's anti-counterfeiting business, which is cyclical in nature, is expected to rebound in calendar 2018, he said.  

The Cobham transaction increases Viavi's exposure to wireless testing applications — a positive, the analyst said. Loop Capital Markets proejcts a higher operating margin and 50-percent EPS accretion as a result of the acquisition. 

"With minimal financial leverage ... post the acquisition of the Cobham businesses and nearly $5 billion in [net operating losses], we believe Viavi has the capacity to make further significantly accretive acquisitions in the future," Kisner said. 

Loop Capital Markets lowered its 2019 estimates for Viavi to reflect the company's lowering of its 2018 3-D sensing forecast. 

"While we can't help but feel some hesitation to upgrade a stock that has just appreciated 15 percent, we are now convinced there's likely further upside after considering the accretion potential of the Cobham acquisition and the possibility for other accretive acquisitions," Kisner said. 

The Price Action

Viavi was down 2.3 percent at $9.77 at the time of publication Monday afternoon. 

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A handheld Viavi test platform for optic networks. Courtesy photo.