Leading analog semiconductor manufacturer Avago Technologies Limited AVGO is scheduled to report its fourth-quarter fiscal 2015 results after the closing bell on Dec 2. In the last reported quarter, Avago’s adjusted earnings comfortably exceeded the Zacks Consensus Estimate by 11 cents. Let’s see how things are shaping up for this announcement.
Key Factors in the Fourth Quarter
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 reduces 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 along with bi-directional transmission optics.
In addition, Avago 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.
Avago recently secured an unconditional approval from the European Union for its proposed acquisition of rival Broadcom Corp. The deal worth $37 billion is arguably the largest of its kind in the semiconductor chip industry and would create a behemoth with one of the most diversified communications platform in the semiconductor industry at combined annual revenues of approximately $15 billion.
Synergistic benefits from the merger are likely to increase profitability through economies of scale and mutual sharing of manufacturing expertise, research and development costs and adjustment of staffing expenses. The transaction will likely result in $750 million of annual cost synergies within the first 18 months of operation and is expected to be immediately accretive to non-GAAP earnings and free cash flow.
Earnings Whispers
Despite some inherent strengths, 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.
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%.
Zacks Rank: Avago’s Zacks Rank #4 (Sell) when combined with a 0.00% ESP reduces the predictive power of ESP. Note that stocks with a Zacks Rank of #1 (Strong Buy), #2 (Buy) 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.
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:
Reliance Steel & Aluminum Co. RS with earnings ESP of +5.95% and a Zacks Rank #3.
Capstone Turbine Corp. CPST with earnings ESP of +26.92% and a Zacks Rank #3.
Brady Corp. BRC with earnings ESP of +4.55% and a Zacks Rank #1.
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