We downgrade our recommendation on
Arris Enterprises Inc.
) to Neutral based on its high level of current valuation. The
stock price has soared nearly 35% in the last year and currently
provides limited opportunity for above-market gain. Arris will
report its third-quarter 2013 financial results on Oct 30, after
the closing bell. Arris currently has a Zacks Rank #3 (Hold).
Why the Downgrade?
Arris is solely dependent on cable operators for revenues.
Lack of industry diversification may result in limited business
prospects. Potential shifts in industry dynamics may adversely
impact cable TV service providers.
This is evident from the fact that large telecom carriers in
the U.S. are increasingly expanding their high-speed fiber-based
network and satellite TV providers are also upgrading their
networks. Cable MSOs are gradually losing their basic video
customers to low-cost satellite TV and Internet video service
Customer concentration remains high for the company. In the
previous quarter, the two largest cable TV operators, namely,
Time Warner Cable Inc.
) together accounted for 38.8% of the total revenue of Arris.
Loss of any of these customers would materially impact the
company's top-line growth.
Meanwhile, the acquisition of the Home business division of
Motorola mobility, a subsidiary of
), has placed Arris as the leading player in the broadband DOCSIS
3.0 CPE market. In the second quarter of 2013, the CPE segment of
Arris generated $663 million of total revenue, up by a whopping
344% year over year. The company stated that 90% of its total CPE
shipment was for the DOCSIS 3.0 network.
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