Apple iPhone 3GS, Motorola Milestone and LG GW60 (Photo credit: Wikipedia)
Nov. 30
Avago Technologies Limited
AVGO : NASDAQ : US$35.10
BUY Target: US$43.00
COMPANY DESCRIPTION:
Avago Technologies Limited is a designer, developer and global supplier of analog semiconductor devices. Avago offers products in three primary target markets: wireless communications, wired infrastructure, and industrial and automotive electronics. Applications for Avago products
include smartphones, connected tablets, consumer appliances, data networking and telecom equipment, and enterprise storage servers.
Investment recommendation:
Avago reported strong Q4/F2012 results with mixed Q1/F2013 guidance, as sequentially flat Wireless guidance for the seasonally weaker January quarter was offset by soft Wired Infrastructure and Industrial division guidance. Despite near-term macro headwinds in these divisions, we believe Avago’s proprietary technologies, strong IP portfolio, and diverse customer base in several growth markets position the company for strong long-term growth.
Investment highlights
Q4/F2012 sales of $618M and pro forma EPS of $0.77 were above our $614M/$0.73 estimates driven by very strong sales of Wireless division PA and FBAR filtering solutions into LTE smartphones.
Avago’s strong Wireless results were consistent with checks indicating strong sales for LTE smartphones including the iPhone 5 and Samsung Galaxy S III. Further, we believe Avago is well aligned with leading LTE baseband supplier Qualcomm as other OEMs launch LTE smartphones in an attempt to regain share. Management highlighted plans to quadruple its FBAR production capacity exiting 2013 over 2011 levels given strong FBAR demand due to the growing mix of LTE smartphones.
However, Avago guided to a 5%-9% sequential sales decline, well below estimates. Sequentially flat Wireless sales guidance was in line with our estimates given strong FBAR demand, but weaker trends and limited visibility in Avago’s Wired and Industrial businesses led to the lower guidance than our estimates. As such, we are decreasing our F2013 pro forma EPS estimate from $3.05 to $2.90 and introducing our F2014 estimate of $3.28.
Valuation:
Our $43 price target is based on shares trading at roughly 13x our F2014 pro forma EPS estimate.
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