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Can Avago (AVGO) Keep the Earnings Streak Alive in Q2? - Analyst Blog

Zacks Equity Research
Updated

Leading analog semiconductor manufacturer Avago Technologies Limited AVGO is scheduled to report its second-quarter fiscal 2015 results after the closing bell on May 28. In the last reported quarter, Avago’s adjusted earnings comfortably exceeded the Zacks Consensus Estimate by 21 cents. Let’s see how things are shaping up for this announcement.

Growth Factors in the Second Quarter

Avago recently completed the acquisition of Emulex Corporation in order to expand its enterprise storage portfolio. Emulex complements Avago's enterprise storage capabilities, and boosts its strategy to support next-generation server and storage architectures. Avago expects the acquisition to be immediately accretive to earnings.
 
Acquisitions have been Avago’s favored path to achieve growth. The wireless chip manufacturer is continuously on the lookout for potential targets as it seeks to venture into new markets. Its revenues have more than doubled following its acquisition of two major industry players, LSI Corp. and PLX Technology last year. While LSI, its biggest deal to date, helped Avago expand into the fast-growing storage chip market, the PLX acquisition enabled Avago to fortify its presence in the enterprise and data center arena. Avago’s ability to successfully integrate these companies has driven earnings accretion, and continues to boost overall growth.

Avago is targeting the wireless communications, wired infrastructure and industrial/auto markets. The company’s focus on multiple target markets and geographies mitigates operating risks and lessens the exposure to volatility in any single market. We remain bullish on the BAW filter market, which has tremendous growth potential in China owing to the country’s 4G and Wi-Fi band proliferation.

Avago is also witnessing growth from new 400-600m distance interconnects launched with the CyOptics technology, particularly with bi-directional transmission interconnects that are driving 4x bandwidth without any changes in server-storage architecture. The company envisions increased CyOptics product ramps in the future along with bi-directional transmission optics.

Over the years, Avago has established strong relationships with leading original equipment manufacturers (OEMs) across multiple target markets. These have helped it to gain key insight into customers’ preferences to become more efficient and productive and better serve its target markets. In addition, Avago maintains an efficient global supply chain with a variable, low-cost operating model. The company outsources a majority of its manufacturing operations utilizing third-party foundry, assembly and test capabilities, as well as some of its corporate infrastructure functions. Avago also aims to minimize capital expenditures by focusing on internal manufacturing capacities, leveraging innovative materials and processes to protect intellectual property rights while outsourcing standard complementary metal oxide semiconductor (CMOS) processes. These enable the company to maintain sustainable revenue growth and expand margins.

Earnings Whispers

With inherent strengths, our proven model conclusively shows that Avago is likely to beat earnings this quarter as it possesses the key ingredients for a success recipe.

Zacks ESP: Expected Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at +1.64%. This indicates a likely earnings beat for the shares.

Zacks Rank: Avago’s Zacks Rank #2 (Buy) combined with a positive ESP increases the predictive power of ESP. Note that stocks with a Zacks Rank of #1 (Strong Buy), #2 and #3 (Hold)  have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions momentum.  

Other Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Casey's General Stores, Inc. CASY with earnings ESP of +14.29% and a Zacks Rank #2.

Ciena Corporation CIEN with earnings ESP of +21.43% and a Zacks Rank #1.

Canadian Imperial Bank of Commerce CM with earnings ESP of +2.20% and Zacks Rank #2.

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 >>


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
 
CIENA CORP (CIEN): Free Stock Analysis Report
 
AVAGO TECHNOLOG (AVGO): Free Stock Analysis Report
 
CDN IMPL BK (CM): Free Stock Analysis Report
 
CASEYS GEN STRS (CASY): Free Stock Analysis Report
 
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Zacks Investment Research