Avago's stock surged 7.5% to $82.09 on Friday on volume that was more than triple its three-month average of 1.7 million shares, hitting a 52-week intra-day high following the semiconductor supplier's fiscal third-quarter earnings report. The Singapore-based company is benefiting from its association with Apple as well as from its recent acquisition of LSI, acquired in May for $6.6 billion. Avago is also in the process of selling units deemed as outside its core business.
Late Thursday, the Singapore-based company reported adjusted net income from continuing operations of $347 million, or $1.26 a share, for the fiscal third-quarter compared to $188 million, or 74 cents a share, in the year-earlier period and earnings of $1.06 a share expected by analysts. Revenue from continuing operations doubled to $1.28 billion for the quarter. On a GAAP basis, the company reported a loss of $164 million, or 65 cents a share, from continuing operations. Avago forecasted revenue growth between 18% and 22% for its final quarter of the fiscal year.
Several equity analysts raised their price targets on Avago's stock following earnings late Thursday. Here's what analysts were saying.
John Vinh, Pacific Crest Securities (Outperform; Price Target raised to $90 from $85)
We are buyers of AVGO and are increasing our target to $90 following solid execution on the top and bottom line. Upside to revenue guidance was driven by content gains at Apple, while LSI cost synergies resulted in EPS upside.
Mark Lipacis, Jefferies (Hold; Price Target raised to $84 from $76)
AVGO continues to positively surprise us with strong results, and the outlook for Wireless sales to grow 60% QoQ on increased FBAR [film bulk acoustic resonator] content at Apple is no exception. We like the increased diversification of AVGO's sales base from the retained LSI businesses. On the other hand, we expect most of AVGO's FCF to go toward repaying its $5.5bn debt over the next three years (versus buybacks).
John Pitzer, Credit Suisse (Outperform; Price Target raised to $105 from $75)
While we have been bullish on shares of AVGO and have been okay in predicting directional trends, we, like many of our peers, continue to under-estimate the magnitude of earnings power - specifically, we are raising our FY15 EPS (ex SBC) from $5.20 to $6.90 - and while the magnitude is significant, we would note our new FY15 EPS represents normal seasonal q/q revenue trends off a higher F4Q14 base - and are likely still wrong and too low and does not reflect the likely pay-down of debt (10 cents accretion). The two key standouts from the quarter were FBAR content growth and operating leverage - specifically: (1) AVGO guided wireless to grow 60% q/q with 2/3 of growth coming from higher dollar content in flagship phones - we see an additional 25% plus content growth as carrier aggregation becomes more prevalent in CY15 and (2) AVGO realized $100m of annualized cost savings in the first quarter after the LSI acquisition and $200m of annualized savings from recent divestitures.
Alex Gauna, JMP Securities (Market Perform)
In our view, Avago deserves credit for focusing on its most defensible business lines, consequently improving operating margins, and crisply executing the synergistic LSI acquisition and non-core divestitures. However, the less focused and acquisition complicated business model it is evolving into, its >$5 billion debt burden, and valuation levels are keeping us on the sidelines pending a better entry point to the stock or indications that the newly combined entity has upside potential not already baked in.
Michael Walkley, Canaccord Genuity, (Buy; $95 PT)
Avago guided Q4/F14 sales from continuing operations of $1.54B at the mid-point versus our $1.45B estimate. The strong sales guidance was mainly driven by expectation for a 60%+ Q/Q increase in Wireless division sales driven by strong demand from TD-LTE smartphones in China and growing content in Apple's next-generation iPhone products. Further, Avago anticipates similarly strong Wireless division sales in Q1/F15 or the Jan Q driven by similar smartphone market dynamics. Given the strong Q3/F14 results and guidance, we raise our F14/F15 pro forma EPS estimates from $3.98/$5.55 to $4.63/$6.35.
TheStreet Ratings team rates AVAGO TECHNOLOGIES LTD as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate AVAGO TECHNOLOGIES LTD (AVGO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins, good cash flow from operations, increase in net income and solid stock price performance. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 9.1%. Since the same quarter one year prior, revenues rose by 24.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The gross profit margin for AVAGO TECHNOLOGIES LTD is rather high; currently it is at 58.92%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 22.53% is above that of the industry average.
- Net operating cash flow has increased to $251.00 million or 31.41% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -8.94%.
- The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Semiconductors & Semiconductor Equipment industry average. The net income increased by 39.8% when compared to the same quarter one year prior, rising from $113.00 million to $158.00 million.
- Powered by its strong earnings growth of 35.55% and other important driving factors, this stock has surged by 108.44% over the past year, outperforming the rise in the S&P 500 Index during the same period. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- You can view the full analysis from the report here: AVGO Ratings Report
--Written by Laurie Kulikowski in New York.