(AVGO), a Singapore incorporated company with joint headquarters in
San Jose, California, is a leading designer, developer, and
supplier of a broad range of analog semiconductor devices and
digital, mixed signal, and optoelectronics components and
subsystems. These innovations are used in wide range of wireless,
wireline, and industrial applications.
Avago started as a
(HPQ) semiconductor division in the 1960's and was later a part of
Agilent that was spun-off from HP with an IPO in 2009. The $18
billion company makes radio frequency chips that are used in
(AAPL), Samsung and other mobile device manufacturers.
Avago products primarily serve four markets: Enterprise Storage
(38% of FY 2013 revenue), Wireless Communications (25%), Wired
Infrastructure (23%), and Industrial & Other (14%). It has a
diversified revenue model with 37% of its FY 2013 revenue derived
from China, 20% from North America, 10% from Europe and 33% from
the rest of the world.
Solid Q2 Report
On May 29, Avago reported its financial results for Q2 of its
fiscal year 2014, ended May 4. Net income for the quarter was $158
million or $0.61 per share, up from net income of $134 million or
$0.53 per share for the prior quarter and net income of $113
million or $0.45 per share in Q2 last year.
According to the management, "our wireless business came in
significantly above our expectations due to strong product ramps
for our FBAR-related products into multiple Asian Smartphone OEMs.
We also saw resurgence in Industrial re-sales through our
distributors, especially in Europe and Japan".
On May 6, Avago closed the acquisition of LSI Corporation.
Subsequent to the acquisition Avago joined the S&P 500 index,
replacing LSI Logic.
Vertical EPS Revisions
In mid-June, my colleague Neena Mishra wrote on Avago as Bull of
the Day and noted "As a result of continued solid performance, the
Zacks Consensus Estimates for FY 2014 and 2015 have increased to
$3.29 per share and $4.51 per share." The EPS table below shows the
most recent consensus estimates and explains whey the stock became
a Zacks #1 Rank again this month as analysts kept raising their
You can also see that these are the kind of implied growth rates
that make growth stock portfolio managers salivate. What this table
doesn't show you is where those consensus EPS estimates were before
the most recent company guidance. 2014 estimates were raised from
$3.01 to $3.31 (+10%) and 2015 estimates were hiked a whopping 31%
from $3.50 to $4.59. That's a powerful bump in the company's
earnings momentum and outlook.
Analysts and Funds Target Higher Prices
After that earnings report and the subsequent estimate bumps, I
took a look at this Zacks #1 Rank to see if it had something else
that makes it a buy for me: strong institutional interest. I found
that the $275 billion Capital Research Investors disclosed a big
position of 25.8 million shares (10% of the company) in early May
in a 13G filing.
This was likely in reaction to the company being added to the
S&P 500 after they closed their acquisition of LSI. But knowing
some of the holdings and strategies of Capital Research, a sister
fund of the equally large Capital World Investors, this is a growth
play for them as well.
In July, Stern Agee analysts reiterated why Avago had been recently
added to the firm's Best Ideas list with a $93 price target, noting
that "execution discipline and product leadership make it top
The analysts hosted investor meetings with AVGO's CFO and gave
these "key takeaways: 1) expect a strong 2H with China builds and
marquee phones, no supply chain slowdown, 2) LSI synergies running
ahead of time line driving upside GM-OM versus consensus, 3)
increasing 2H14-2015 Wireless content as 4G ramp focuses handset
OEMs on FBAR as key, and 4) stable HDD, Wired 40G Bi-Di ramps, and
hyperscale storage demand, combined with a focus on execution,
should make AVGO a top L-T stock. Raising estimates and PT to $93."
And after Apple's earnings, Oppenheimer analysts, who have an
Outperform rating on AVGO shares, were even more positive. Here's
what they had to say...
"AAPL represents ~15-20% of Avago sales before the acquisition of
LSI. The company primarily supplies RF filter and power amplifier
components in the iPhone/iPad. Following the LSI acquisition and
AAPLs move back to a single SKU for iPhone 6 we believe AVGO could
see 30%+ content gains on iPhone 6."
Bottom line: In a strong semiconductor industry, this is one large
cap name I want to own for growth with solid business footholds in
both enterprise networking and mobile devices. They would seem to
benefit from all dimensions of a more connected world.
Disclosure: I own AVGO shares for the Zacks FTM Portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs
Follow The Money
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
HEWLETT PACKARD (HPQ): Free Stock Analysis
AVAGO TECHNOLOG (AVGO): Free Stock Analysis
APPLE INC (AAPL): Free Stock Analysis Report
To read this article on Zacks.com click here.