Will Avago (AVGO) Surprise this Earnings Season? - Analyst Blog

Leading analog semiconductor manufacturer Avago Technologies Limited AVGO is scheduled to report its second-quarter fiscal 2014 results after the closing bell on May 29. In the last reported quarter, Avago's earnings exceeded the Zacks Consensus Estimate by 5 cents. Let's see how things are shaping up for this announcement.

Growth Factors in the Second Quarter

Avago recently completed the acquisition of LSI Corporation for $6.6 billion in cash. The transaction diversified its existing business line from wired infrastructure, wireless and industrial businesses into the storage chip market. The strategic move was aimed at augmenting its revenues, as the industry braces for more consolidation amid a challenging macroeconomic environment.

With annual revenues of approximately $5 billion, the combined company is expected to be one of the behemoths in the semiconductor industry, offering a complementary yet diversified product portfolio to a wider range of customers. Leveraging on economies of scale, Avago is expected to benefit from the rapid increase in data center IP (Internet protocol) and mobile data traffic, to emerge as the undisputed leader in the enterprise storage market.

In addition to cost synergies from a combined resource pool as the cost of designing and building semiconductors rises, the acquisition is likely to improve the operating margin of the combined company, creating greater scale to further drive innovation into the datacenter. The transaction is expected to be accretive to Avago's free cash flow and recurring earnings, leading to annual cost savings of $200 million by fiscal 2015.

With the acquisition, Avago has replaced LSI on the S&P 500 after the close of trading on May 7. This has further raised investor confidence, who seek to own blue-chip stocks.

Earnings Whispers

Despite focused attempts to restructure its business, our proven model does not conclusively show that Avago is likely to beat earnings this quarter as it lacks the key ingredients for a success recipe.

Zero Earnings ESP: Expected Surprise Prediction or ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at 0.00%. This indicates a likely in line earnings for the shares.

Zacks Rank #3 (Hold): Avago's Zacks Rank #3 reduces the predictive power of ESP. Note that stocks with Zacks Ranks of #1, 2 and 3 have a significantly higher chance of beating earnings. However, when combined with 0.00% ESP, the Zacks Rank #3 fails to conclusively predict an earnings surprise for Avago. Meanwhile, we caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement.  

Other Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

OmniVision Technologies, Inc. OVTI, Earnings ESP of +50.00% and Zacks Rank #1 (Strong Buy).

Vail Resorts Inc. MTN, Earnings ESP of +6.14% and Zacks Rank #2 (Buy).

Sanderson Farms, Inc. SAFM, Earnings ESP of +2.44% and Zacks Rank #1 (Strong Buy).