Avago Technologies Limited (AVGO) is scheduled to report fourth-quarter 2014 results after the closing bell on Dec 3. In the last reported quarter, Avago’s adjusted earnings comfortably exceeded the Zacks Consensus Estimate. Let’s see how things are shaping up for this announcement.
Factors to Consider
Avago is expected to benefit from the recent acquisition of PLX Technology Inc. The strategic purchase complements Avago's existing server storage connectivity and networking ASIC (application-specific integrated circuit) products that serve the enterprise and data center market.
Avago has been continuously increasing the quarterly dividend since its inception. It recently announced a 10.3% year-over-year hike in its interim quarterly dividend payout to 32 cents per share or $1.28 on an annualized basis. The fourth-quarter fiscal 2014 dividend was paid in cash on Sep 30 to shareholders of record as of Sep 19. Avago further expects to strengthen its position through organic growth across the industry verticals and increased market penetration buoyed by the LSI acquisition. The acquisition 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.
However, the company faces inherent operating risks. Often, a product may not be accretive to the company’s earnings. Besides, in a market where a new technological product is introduced every day, the product can become obsolete in a short period. These lead to high operating expenses, which can adversely impact margins.
Adverse global economic conditions could further affect customer confidence and delay spending, leading to reduced demand for products and higher pricing pressures.
Earnings Whispers
Our proven model does not conclusively show that Avago will beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is pegged at 0.00%. This is because both the Most Accurate estimate and Zacks Consensus Estimate currently stand at $1.52.
Zacks Rank #3 (Hold): Avago’s Zacks Rank #3 when combined with 0.00% ESP makes surprise prediction difficult.
We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Other Stocks to Consider
Here are some companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat in the imminent future.
Arch Capital Group Ltd. (ACGL) earnings ESP of +2.08% and Zacks Rank #1
PG&E Corporation (PCG) earnings ESP of +1.85 % and Zacks Rank #1
Esterline Technologies Corp. (ESL) earnings ESP of +5.35% and Zacks Rank #2.
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