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Raymond James Upgrades CommScope, Says Arris Deal Accretion Will Be Higher Than Expected

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Raymond James Upgrades CommScope, Says Arris Deal Accretion Will Be Higher Than Expected

Shares of CommScope Holding Company Inc (NASDAQ: COMM) do not reflect the extent of earnings accretion that is likely from the pending acquisition of ARRIS International plc (NASDAQ: ARRS), according to Raymond James. 

Analysts said in the note that the deal, which is likely to close soon, will provide at least 40 percent accretion in 2020, higher than management's projection of over 30 percent.

The Analyst

Raymond James’ Simon Leopold upgraded CommScope from Outperform to Strong Buy and maintained a $32 price target. 

The Thesis

CommScope is awaiting regulatory approvals for its pending Arris acquisition. These are likely to come through soon, and the deal is expected to close within the first half of 2019, Leopold said in the Wednesday upgrade note.

Although there is no consensus on earnings accretion from the deal, most analysts are projecting a range of 25-43 percent, the analyst said. The aspect of the deal that many may have missed is that declining memory costs will have a meaningful impact on Arris' profitability, he said. 

RayJay's assumption of at least 40-percent earnings accretion in 2020 may prove conservative, Leopold said. This is because the projection assumes a 1-percent decline in Arris sales in 2019 to $6.678 billion and flat sales in 2020 versus Arris' own forecast of 5-percent sales growth to $7.109 billion in 2019 and 3-percent growth to $7.311 billion in 2020.

Renewed concerns around CommScope's antenna business in the era of 5G seem excessive, in RayJay's view.

5G will require denser antenna deployment, and this means CommScope will not only benefit from a dramatic increase in the number of antennas, but also from rising demand for the associated cabling and apparatus, Leopold said.

Price Action

CommScope shares were up 4.69 percent at $23.90 at the time of publication Wednesday. 

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Latest Ratings for COMM

DateFirmActionFromTo
Dec 2019MaintainsOutperform
Dec 2019DowngradesBuyHold
Oct 2019UpgradesNeutralBuy

View More Analyst Ratings for COMM
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Posted-In: Raymond James Simon LeopoldAnalyst Color M&A News Upgrades Price Target Analyst Ratings Best of Benzinga

 

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