RBC Capital Markets Upgrades Arris Group to Outperform from Sector Perform, Raises PT from $18.00 to $28.00

In a report published Tuesday, RBC Capital Markets analyst Mark Sue upgraded Arris Group, Inc.

to Outperform from Sector Perform, raising its price target from $118.00 to $128.00. According to the article, the upgrade is based on market share gains from competitor Cisco, who seems pre-occupied with protecting its overall gross margins, new products in CCAP and residential video gateways. “Arris, coupled with the Motorola Home assets, now has ~35% of the cable modem market, 15% of the set-top box (STB) market and ~40% share of CMTS market,” the report noted. “Considering lack of product enhancements and focus on protecting margins from competitor Cisco, Arris may be in a position to gain incremental market share. A theoretical assumption of the bulk of Cisco's entire share implies our base-line CY15 revenues for Arris may increase from $5.0B to $7.5B. Incremental gains and enhanced volumes implies our best-case CY15 earnings of $3.00 (upside scenario $36) if Arris grabs sizable share from Cisco. We conservatively estimate Arris may gain closer to 10% to 15% market share from Cisco with Pace, Samsung and Technicolor likely to be share gainers.” The report further asserted that cash flow is being improved by operational improvements, top-line growth and lower taxes driving an improved FCF outlook, which is believed to offer ARRS the flexibility it needs to de-leverage the balance sheet from current $1.37B net-debt levels. The analysts believe ARRS can build on its cash generation with FCF of ~$340M in CY14E and $415M in CY15E. ARRS closed Monday at $24.93 with shares trading up at 3.66 percent.