Market Overview

Earnings Analysis: Avago Technologies

Avago Technologies (NASDAQ: AVGO) reports preliminary financial results for the year ended 2012-10-31.

Avago Technologies Ltd. recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Avago Technologies Ltd.'s analysis versus peers uses the following peer-set: Texas Instruments Incorporated (TXN), Analog Devices Inc. (ADI), Infineon Technologies AG ADS (IFNNY), STMicroelectronics N.V.(STM), Skyworks Solutions Inc. (SWKS), LSI Corp. (LSI), Hittite Microwave Corp.(HITT), Vishay Intertechnology Inc. (VSH), RF Micro Devices Inc.(RFMD) and TriQuint Semiconductor Inc.(TQNT). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million) 2012-10-31 2011-10-31 2010-10-31 2009-10-31 2008-10-31
Revenues 2,364.0 2,336.0 2,093.0 1,484.0 1,699.0
Revenue Growth % 1.2 11.6 41.0 (12.7) 11.3
Net Income 563.0 552.0 415.0 (44.0) 57.0
Net Income Growth % 2.0 33.0 N/A (177.2) N/A
Net Margin % 23.8 23.6 19.8 (3.0) 3.4
ROE % 25.4 31.4 32.6 (4.8) 7.7
ROA % 21.2 24.0 20.1 (2.3) 3.0

Valuation Drivers

Avago Technologies Ltd.'s current Price/Book of 3.5 is about median in its peer group. We classify AVGO-US as Harvesting because of the market's low expectations of growth (PE of 15.2 compared to peer median of 19.7) despite its relatively high returns (ROE of 25.4% compared to the peer median ROE of 12.4%).

The company has a successful operating strategy with above median net profit margins of 23.8% (vs. peer median of 11.1%) and relatively high asset turns of 0.9x (vs. peer median of 0.7x). This suggests that the company has a dominant operating model relative to its peers. AVGO-US's net margin is its highest relative to the last five years and compares to a low of -14.4% in 2007.

Economic Moat

The company enjoys both better than peer median annual revenue growth of 1.2% and better than peer median earnings growth performance 2.0%. AVGO-US currently converts every 1% of change in annual revenue into 1.7% of change in annual reported earnings. We view this company as a leader among its peers.

AVGO-US's return on assets is above its peer median both in the current period (21.2% vs. peer median 8.1%) and also over the past five years (13.2% vs. peer median 6.3%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's gross margin of 54.0% is around peer median suggesting that AVGO-US's operations do not benefit from any differentiating pricing advantage. However, AVGO-US's pre-tax margin is more than the peer median (24.7% compared to 11.1%) suggesting relatively tight control on operating costs.

Growth & Investment Strategy

While AVGO-US's revenues growth has been above the peer median (16.8% vs. 7.4% respectively for the past three years), the stock's PE ratio of 15.2 is less than the peer median. This implies that the company's earnings are peaking and the market expects a decline in its growth expectations.

AVGO-US's annualized rate of change in capital of 13.9% over the past three years is around the same as its peer median of 13.9%. This investment has generated a better than peer median return on capital of 26.5% averaged over the same three years. The greater than peer median rate of return suggest that the company may be under investing in growth.

Earnings Quality

AVGO-US has reported relatively strong net income margin for the last twelve months (23.8% vs. peer median of 11.1%). This strong margin performance was accompanied by a level of accruals that was around peer median (5.5% vs. peer median of 6.2%) suggesting that the reported net income is supported by a reasonable level of accruals.

AVGO-US's accruals over the last twelve months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.

Trend Charts

Graph of Revenues Trend for Avago Technologies Ltd. (NASDAQ: <a class=
Graph of Revenues Trend for Avago Technologies Ltd. (NASDAQ: <a class=
Graph of Net Margin Trend for Avago Technologies Ltd. (NASDAQ: <a class=
Graph of Net Margin Trend for Avago Technologies Ltd. (NASDAQ: <a class=
Graph of Accruals Trend (% revenues, Quarterly) for Avago Technologies Ltd. (NASDAQ: <a class=
Graph of Accruals Trend (% revenues, Annual or TTM) for Avago Technologies Ltd. (NASDAQ: <a class=

Disclaimer

The information presented in this report has been obtained from sources deemed to be reliable, but AnalytixInsight does not make any representation about the accuracy, completeness, or timeliness of this information. This report was produced by AnalytixInsight for informational purposes only and nothing contained herein should be construed as an offer to buy or sell or as a solicitation of an offer to buy or sell any security or derivative instrument. This report is current only as of the date that it was published and the opinions, estimates, ratings and other information may change without notice or publication. Past performance is no guarantee of future results. Prior to making an investment or other financial decision, please consult with your financial, legal and tax advisors. AnalytixInsight shall not be liable for any party's use of this report. AnalytixInsight is not a broker-dealer and does not buy, sell, maintain a position, or make a market in any security referred to herein. One of the principal tenets for us at AnalytixInsight is that the best person to handle your finances is you. By your use of our services or by reading any our reports, you're agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that AnalytixInsight, its directors, its employees, and its agents will not be liable for any investment decision made or action taken by you and others based on news, information, opinion, or any other material generated by us and/or published through our services. For a complete copy of our disclaimer, please visit our website www.analytixinsight.com.

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