On May 15, Zacks Investment Research upgraded leading analog
Avago Technologies Limited
) to a Zacks Rank #1 (Strong Buy) from a Zacks Rank #2 (Buy)
largely on the back of strong long-term fundamentals buoyed by the
acquisition of LSI Corporation.
Avago's share prices have steadily been on the uptrend over the
past one year and have more than doubled for a healthy
year-over-year return of 100.3%. The stock is currently trading at
a forward P/E of 22.3x and has long-term earnings growth
expectation of 15.4%.
Why the Upgrade?
Avago recently completed the acquisition of LSI for $6.6 billion in
cash. Avago acquired LSI to diversify its existing business line
from wired infrastructure, wireless and industrial businesses into
the storage chip market. The strategic move was aimed at augmenting
its revenues, as the industry braces for more consolidation amid a
challenging macroeconomic environment.
With annual revenues of approximately $5 billion, the combined
company is expected to be one of the behemoths in the semiconductor
industry, offering a complementary yet diversified product
portfolio to a wider range of customers. Leveraging on economies of
scale, Avago is expected to benefit from rapid increases in data
center IP (Internet protocol) and mobile data traffic, to emerge as
the undisputed leader in the enterprise storage market.
In addition to cost synergies from a combined resource pool as the
cost of designing and building semiconductors rises, the
acquisition is likely to improve the operating margin of the
combined company, creating greater scale to further drive
innovation into the datacenter. The transaction is expected to be
accretive to Avago's free cash flow and recurring earnings, leading
to annual cost savings of $200 million by fiscal 2015.
With the acquisition, Avago has replaced LSI on the S&P 500
after the close of trading on May 7. This has further raised
investor confidence, who seek to own blue-chip stocks.
Over the last 7 days, the earnings estimates did not show any
upward or downward revision for 2014. Despite the lack of estimate
revisions, we envision an uptrend for the stock backed by its
strong growth potential.
Other Stocks to Consider
Other stocks worth considering in the industry include
Advanced Semiconductor Engineering Inc.
Alpha & Omega Semiconductor, Ltd.
Amkor Technology, Inc.
), each carrying a Zacks Rank #2 (Buy).
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