Avago Technologies Limited

AVGO : NASDAQ : US$34.43
BUY 
Target: US$42.00

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 and servers.

UNEXPECTED INDUSTRIAL GROWTH DRIVES BEAT; ANTICIPATE H2 WIRELESS RECOVERY
Investment recommendation:

Avago reported solid Q2/F2013 results above low expectations due to a modest recovery in Industrial division sales and strong Wireless division sales to Samsung and other LTE smartphone OEMs that helped offset the iPhone transition at largest customer Foxconn (Apple). Further, Avago guided to strong sequential growth in all 3 divisions for the July quarter. We anticipate strong Wireless sales growth in 2H/F2013 due to strong FBAR filter demand for new LTE smartphone programs at leading smartphone customers such as Apple, Samsung and others.

Further, 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 and industry-leading margins. We reiterate our BUY rating and $42 target.
Investment highlights
 Q2/F2013 sales of $562M and pro forma EPS of $0.61 were above our $552M/$0.57 estimates due to strong sales of FBAR filters into ramping
LTE smartphone programs and surprising 4% Q/Q sales growth in the highest-margin Industrial division – versus guidance for low single digit
decline – driven by a broad increase in distributor sell-though. Solid Wireless sales despite the Apple product transition were consistent with our surveys indicating strong LTE smartphone sales, including the Galaxy S 4, as Samsung was a 10% Avago customer for the first time.
 Avago management guided to a 6%-9% Q/Q increase in revenue for the July quarter driven by solid Q/Q growth in all divisions, including highsingle- digit Q/Q growth in Wireless due to the initial sales ramp into new smartphone programs at Apple.
 Our bullish H2 Wireless outlook remains unchanged, though we slightly increase our F2013E pro forma EPS from $2.73 to $2.74 and our F2014
estimate from $3.19 to $3.21 due to a modestly increased outlook for Avago’s Industrial division.
Valuation:

Our $42 price target is based on shares trading at roughly 13x our F2014 pro forma EPS estimate.