We downgrade our recommendation on
Arris Group Inc.
) to Neutral ahead of its first quarter of fiscal 2013 financial
results, which will be released on Apr 24, after the closing
Why the Downgrade?
We downgrade Arris based on its high-level of current
valuation. Arris is currently trading at a significantly higher
multiple with respect to several valuation metrics compared with
the S&P 500. The stock price has soared over 50% over the
last year and is currently trading at a 52-week high end. We
believe that Arris is currently fairly valued as this high level
of valuation will restrict above-market gain anytime soon. Arris
currently has a Zacks Rank #3 (Hold).
Risk/Reward Almost Balanced
Arris is solely dependent on cable operators for its revenue.
Lack of industry diversification may result in limited business
prospects. Potential shifts in industry dynamics may adversely
impact the 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 providers.
On the positive side, Arris recently acquired the cable set
top box business of Motorola Mobility, a subsidiary of
). This acquisition will undoubtedly help Arris attain a strong
foothold in the video offerings market. The merged entity will
have a global presence of more than 500 customers in 70
countries. This will reduce Arris' dependence on
Time Warner Cable Inc.
), which together constitute about half of the company's total
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