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Avago Trumps Analysts' Fears: What They're Saying Now

Avago Trumps Analysts' Fears: What They're Saying Now

Shares of Avago Technologies Ltd (NASDAQ: AVGO) were trading higher by nearly 7 percent an hour after Thursday's opening bell, following the company's second-quarter results on Wednesday.

Avago said that it earned $2.24 per share in the second quarter, ahead of the $2.14 per share analysts were expecting, while revenue of $1.735 billion was roughly in-line with the $1.74 billion analysts were expecting.

Here is a roundup of what some of Wall Street's top analysts are saying.

Oppenheimer: Diversity Of Products

Rick Schafer of Oppenheimer commented that Avago's wireless (35 percent of sales) benefited from iPhone 6s' pre-builds and the ongoing GS6 ramp. The analyst suggested that the company say "modest" content gains in iPhone 6s.

Related Link: Can Avago Technologies Ride The Apple Supplier Wave?

Schafer continued that FBAR (>80 percent of wireless revenue) will see its capacity constrained for the foreseeable future, although management continues "making strides" at doubling capacity by mid-2016 and additional capacity could support Chinese smartphone original equipment makers by the end of 2016.

Finally, storage (34 percent of sales) benefited from a full quarter of Emulex (following its acquisition earlier this year), as well as strong datacenter demand.

Looking forward, Schafer continues to see 30 percent-plus earnings per share accretion in 21016 as the company looks to integrate Broadcom into its business model and create synergies.

Shares remain Outperform rated with an unchanged $115 price target.

MKM: Clear Focus

Ian Ing of MKM Partners commented in a note that Avago's earnings per share beat in the second quarter came from better-than-expected revenue in enterprise storage, gross margin improvements and faster than expected synergies from Emulax. Meanwhile, "light" revenue for the quarter was more than offset by solid gross margin and expense controls.

Ing continued that Avago's wireless segment was guided higher by more than 10 percent, while North American flagship content was expected to "not decline" in new models. The analyst added that bears may point to deceleration in the segment versus a year ago, he believes that demand on RF and complexity increases in successive generations continues to rise.

Ing also suggested the company should consider strategic alternatives for its industrial segment, which is expected to decline to a mid-single digit percentage of sales post-integration of Broadcom. The analyst added, it "makes sense" to find a buyer who has greater scale in the catalog business.

Finally, Avago's wired infrastructure business saw strength in fiber-to-the-home, especially in China. The analyst stated that the company can "opportunistically" pursue more commodity-like business while preserving its margins moving forward.

Shares remain Buy rated with an unchanged $159 price target.

Brean: ‘Compelling' Story

Mike Burton of Brean Capital commented in a note that Avago reported a "solid" second-quarter print, despite the ongoing "market turbulence" and "more cautious" commentary from its peers.

Burton continued that Apple Inc. (NASDAQ: AAPL) continues to help Avago's results, as its mobile segment drove July revenues and is now set up for a seasonally strong October quarter. The analyst added that even though the company's guidance came in below expectations, gross margins and operating expenditures are "looking better than expected," which will help earnings per share in the coming quarters.

Looking forward, the company's Industrial segment is expected to decline in October, but it is seeing a "nice uptick" in wired infrastructure and enterprise storage segments, in addition to the "strong" ramp at Apple. Meanwhile, the acquisition of Broadcom is expected to help with cost savings, as the acquisition is "likely" to close in the first quarter of next year.

Shares remain Buy rated with a price target lowered to $170 from a previous $180.

Pacific Crest: Results And Outlook ‘Better Than Feared'

John Vinh of Pacific Crest commented in a note that Avago's industrial revenue grew by a high single digit due to inventory replenishment, while its guidance for flat to down indicates distributors are expected to reduce their inventories in the fourth quarter. Meanwhile, outperformance in storage was driven by the inclusion of Emulex.

Vinh added that it "remains unclear" why Avago isn't seeing content increase in the new iPhone. However, he noted that the company has already seen its content increase by about 100 percent in 2015, which creates a "difficult" comparison. However, Avago's plan to increase capacity by 50 percent next fiscal year (October) indicates its confidence that its content in the (yet to be official) iPhone 7 will increase.

Bottom line, Vinh stated "we are buyers" of Avago as "plans for filter expansion indicate this was a temporary setback."

Shares remain Overweight rated with an unchanged $180 price target.

Image Credit: Public Domain


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