Leading analog semiconductor manufacturer Avago Technologies Limited (AVGO) is scheduled to report its third-quarter fiscal 2014 results after the closing bell on Aug 28. In the last reported quarter, Avago’s non-GAAP earnings comfortably exceeded the Zacks Consensus Estimate. Let’s see how things are shaping up for this announcement.
Growth Factors in the Third Quarter
Avago recently completed the acquisition of PLX Technology Inc. for approximately $309 million in cash. The strategic purchase complemented Avago's existing server storage connectivity and networking ASIC (application-specific integrated circuit) products that serve the enterprise and data center market. This, in turn, is expected to augment Avago’s revenues, as the industry braces for more consolidation amid a challenging macroeconomic environment.
The core PLX Technology business is deemed to be a strategic fit for Avago, further adding a new dimension to next generation data center architectures. In addition to cost synergies from a combined resource pool as the cost of designing and building semiconductors rises, the acquisition is likely to improve the operating margin of the combined company, creating greater scale to further drive innovation into the datacenter. The acquisition is expected to be immediately accretive to Avago’s non-GAAP earnings.
Prior to that, Avago completed the acquisition of LSI Corporation in May for $6.6 billion in cash. The transaction diversified its existing business line from wired infrastructure, wireless and industrial businesses into the storage chip market. With annual revenues of approximately $5 billion, the combined company is expected to be one of the behemoths in the semiconductor industry, offering a complementary yet diversified product portfolio to a wider range of customers.
Leveraging on economies of scale, Avago is expected to benefit from the rapid increase in data center IP (Internet protocol) and mobile data traffic, to emerge as the undisputed leader in the enterprise storage market. The transaction is expected to be accretive to Avago's free cash flow and recurring earnings, leading to annual cost savings of $200 million by fiscal 2015.
Earnings Whispers
Despite focused attempts to restructure its business, our proven model does not conclusively show that Avago is likely to beat earnings this quarter as it lacks the key ingredients for a success recipe.
Zero 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 0.00%. This indicates a likely in line earnings for the shares.
Zacks Rank #3 (Hold): Avago’s Zacks Rank #3 reduces the predictive power of ESP. Note that stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings. However, when combined with 0.00% ESP, the Zacks Rank #3 fails to conclusively predict an earnings surprise for Avago. Meanwhile, we caution against stocks with Zacks #4 and #5 Ranks (Sell-rated stocks) going into the earnings announcement.
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:
Abercrombie & Fitch Co. (ANF), Earnings ESP of +10.00% and Zacks Rank #2 (Buy).
Dorian LPG Ltd. (LPG), Earnings ESP of +50.00% and Zacks Rank #2 (Buy).
Lannett Company, Inc. (LCI), Earnings ESP of +23.53% and Zacks Rank #2 (Buy).
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