Avago Could Be a Good Bargin, Here's Why

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For investors looking for a technology stock with solid fundamentals (high margins and revenue growth, strong ROE, and low debt/equity) and in demand products, Avago Technologies (NASDAQ: AVGO) could be a great investment. Avago Technologies, with a market cap of $8.60 billion, is engaged in manufacturing semiconductor products with an extensive portfolio with over 6,500 products, including RF amplifiers, RF filters, RF front-end modules, and many others. Avago is backed by an extensive portfolio of intellectual property including approximately 4,200 patents and pending applications. Avago also makes chips for Apple’s iPhones and other mobile devices.

M&A and Share Repurchase

On April 11, 2013, Avago acquired CyOptics for about $400 million in cash. CyOptics will help Avago boost its lineup of fiber optics products and provide revenue growth. The deal is expected to be closed in Q3, 2013. On the same day, Avago also announced that its Board of Directors had approved a share repurchase program for 2013 to repurchase up to 20 million of its ordinary shares. This replaces the 2012 share repurchase program (up to 15 million), which expired on April 10.

Target Price and Earnings Estimate

Analysts currently have a mean target price of $41.05, suggesting a 17.59% upside potential based on the closing price of $34.91 on April 12. For the current quarter, analysts are projecting an EPS of $0.52 with revenue of $560.15 million. Avago is expected to release its Q2, 2013 earnings on May 27, 2013. Avago had 4 positive earnings surprises in the last 4 quarters.

Fundamentally, Avago’s key stats will be compared to its peers in the semiconductors industry, including Skyworks Solutions (NASDAQ: SWKS) and Analog Devices (NASDAQ: ADI), as well as the industry average to see where it stands.

<table> <thead> <tr><th> </th><th> <p>Avago</p> </th><th> <p>Skyworks Solutions</p> </th><th> <p>Analog Devices</p> </th><th> <p>Industry Average</p> </th></tr> </thead> <tbody> <tr> <td> <p>Market Cap</p> </td> <td> <p>$8.60 billion</p> </td> <td> <p>$4.24 billion</p> </td> <td> <p>$13.64 billion</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p>Revenue Growth (3 Year Average)</p> </td> <td> <p>16.8</p> </td> <td> <p>25.0</p> </td> <td> <p>10.3</p> </td> <td> <p>11.9</p> </td> </tr> <tr> <td> <p>Operating Margin, %, ttm</p> </td> <td> <p>24.2%</p> </td> <td> <p>16.4%</p> </td> <td> <p>29.7%</p> </td> <td> <p>22.7%</p> </td> </tr> <tr> <td> <p>Net Margin, %, ttm</p> </td> <td> <p>23.7%</p> </td> <td> <p>13.0%</p> </td> <td> <p>24.0%</p> </td> <td> <p>17.1%</p> </td> </tr> <tr> <td> <p>ROE</p> </td> <td> <p>24.7</p> </td> <td> <p>11.7</p> </td> <td> <p>15.8</p> </td> <td> <p>20.2</p> </td> </tr> <tr> <td> <p>Debt/Equity</p> </td> <td> <p>0</p> </td> <td> <p>0</p> </td> <td> <p>0.2</p> </td> <td> <p>0.3</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>15.5</p> </td> <td> <p>20.2</p> </td> <td> <p>21.3</p> </td> <td> <p>21.8</p> </td> </tr> <tr> <td> <p>Forward P/E</p> </td> <td> <p>11.6</p> </td> <td> <p>9.2</p> </td> <td> <p>16.2</p> </td> <td> <p>14.3 (S&P Average)</p> </td> </tr> </tbody> </table>

Source: Morningstar

Skyworks Solutions designs and manufactures chips that enable wireless capabilities in cell phones and tablets. Skyworks is expected to benefit from several emerging trends in the wireless industry. Analog Devices, on the other hand, is one of the world's largest analog chipmakers, which is well positioned in several markets, including automotive and wireless market.

Avago has higher margins and revenue growth as compared to the industry, yet it is trading with a low P/E of 15.5 (industry average of 21.8). Comparing to Avago, Skyworks Solutions offers a faster revenue growth with an attractive low Forward P/E of 9.2, whereas Analog Devices generates higher margins with a higher valuation. Avago offers a good mix of revenue growth and high margins and is currently undervalued with a Forward P/E of 11.6. With a total cash of $1.16 billion and a small total debt of $3.00 million, Avago also has a very healthy balance sheet. Avago continues to generate a steady cash flow with an operating cash flow of $739 million, ttm, and a levered free cash flow of $287.12 million, ttm. Avago continues to increase its dividend since 2010 and the last dividend of $0.19 was distributed on March 21.

Bottom Line

Avago remains a sounding technology investment with its steady growth, high margins, strong ROE, and solid cash flow supported with a healthy balance sheet. As the company continues to raise its dividend and increase its share repurchase, the management continues to be on the right track to return more capital to shareholders and increase shareholders’ value.

Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.


Nick Chiu has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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