Why Analysts and Investors Are Endorsing Avago and Broadcom So Much After Earnings

Avago Technologies Ltd. (NASDAQ: AVGO) released its fiscal fourth-quarter financial results after the markets closed Wednesday, and these results completely wowed analysts and investors alike. Considering the company is in the process of acquiring Broadcom Corp. (NASDAQ: BRCM), the future looks bright for this chip maker, not just earnings but with the outlook as well.

In terms of the earnings, Avago reported earnings per share of $2.51, beating the consensus estimate of $2.38. On the top line, Avago had $1.84 billion in revenue which was just ever-so-slightly lower than the consensus of $1.85 billion.

Analysts see continued strength in Avago’s partnership with Apple in terms of the outlook. Near term there could be some weakness, but as the next generation of iPhone is being developed, analysts are taking a more bullish outlook.

Oppenheimer raised its estimates and price target, after Avago’s fourth-quarter revenue and first-quarter revenue outlook were largely in line with expectations, but EPS of $2.51 and $2.36 (implied), respectively, exceeded on better gross margins and operational expenditures discipline. Strength in enterprise storage offset modest weakness in industrial and wired comms. As previewed, iPhone 6s unit deceleration is expected to drive wireless down in the first quarter, offsetting strength in enterprise storage and wired comms. Efforts to double FBAR capacity by mid-2016 support management’s bullish outlook for 20% content gains on the iPhone 7. The Broadcom acquisition remains on track for an early calendar first quarter close. The firm sees 30% or more EPS accretion in calendar 2016 as Avago integrates Broadcom into its disciplined business model. Oppenheimer remains buyers here, as its price target jumps to $170 from $155.

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Canaccord Genuity analyst Michael Walkley increased his price target to $179 from $165 and had this to say about the company:

Avago reported solid fiscal fourth quarter results above our estimates and issued fiscal first quarter guidance better than feared given investor concerns regarding slower smartphone trends and potential order reductions from leading customer Apple. Further, management remains committed to the Broadcom acquisition and we anticipate strong execution in meeting to achieving synergy targets given the strong track record in integrating acquisitions. We believe the acquisition significantly expands Avago’s TAM and creates a leading global diversified semiconductor company with a broad portfolio of category-leading products and a leading customer base addressing the wireless and wired infrastructure, enterprise & data center networking and storage, IP traffic routing, Home/IoT and Industrial verticals. This acquisition is consistent with our thesis Avago’s proprietary technologies, strong IP, and diverse customer base in several growth markets position the company for solid long-term sales and earnings growth with industry-leading margins. We reiterate our Buy rating and increase our price target to $179 based on our newly-introduced fiscal 2017 estimates.

A couple other analysts weighed in as well:

  • RBC reiterated an Outperform rating and raised its price target to $155 from $150.
  • Mizuho reiterated a Buy rating and raised its price target to $175 from $165.

Shares of Avago were trading up nearly 10% at $144.76 Thursday, with a consensus analyst price target of $161.91 and a 52-week trading range of $95.18 to $150.50.

Broadcom shares were trading up 4.7% at $57.39, with a consensus price target of $54.37 and a 52-week range of $40.21 to $57.70.

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