Avago Technologies Limited BUY Target $54

AVGO : NASDAQ : US$44.50
Target: US$54.00

Avago Technologies Limited is a designer, developer and global supplier of analog semiconductor devices. Avago offers products  in three primary target markets: wireless communications, wired infrastructure, and industrial and automotive electronics.
Applications for Avago products include smartphones, connected  tablets, consumer appliances, data networking and telecom equipment, and enterprise storage and servers.
All amounts in US$ unless otherwise noted.

Technology — Communications Technology — Semiconductors
Investment recommendation: Avago reported Q4/F13 results above our
estimates with strong Wireless and Wired division sales offsetting weaker
than expected Industrial demand. Management provided strong guidance for
the typically seasonally softer Q1/F14 that was also above our estimates. The
strong guidance was driven by continued strong trends in the company’s
Wireless division. We believe Avago’s proprietary technologies, strong IP
portfolio, and diverse customer base in several growth markets position the
company for strong long-term growth trends with industry-leading margins.
We reiterate our BUY rating and increase our price target to $54.
Investment highlights
 Q4/F13 sales of $738M and pro forma EPS of $0.89 were above our
$731M/$0.82 estimates driven by a strong 20% Q/Q sales growth in
Avago’s Wireless division versus our mid-double-digit growth estimate.
Industrial sales were weaker than anticipated and declined 5%
sequentially versus Avago’s sequentially flat guidance due to weaker
demand in China and Japan due in part to lower distributor inventories.
 Avago guided to a 3-6% Q/Q sales decline for the typically seasonally softer
Q1/F14 with overall sales and EPS guidance basically in line with
consensus. Further, Management anticipates roughly sequentially flat
Wireless division sales following strong Q4/F13 Wireless results. We
believe the strong Q1/F14 Wireless guidance is consistent with our
expectations for a TDD-LTE enabled iPhone with strong Avago content
launching at China Mobile prior to Chinese New Year as well as for strong
Avago content in Samsung’s next generation flagship smartphones. Longer
term, we believe the ramping demand for Avago’s FBAR filters in its
Wireless business and stable growth trends in Wired and Industrial
divisions position the company for strong long-term sales and earnings
growth. Please see our Avago note, published Oct 15th, titled ‘Well
positioned for strong near-term results with strong IP and products driving
long-term growth in all divisions’ for further details.
 Due to Q4/F14 results above our estimates and given the strong
Q1/F14 guidance, we increase our F2014/F2015 pro forma EPS
estimate from $3.30/$3.93 to $3.36/$3.98.
Valuation: Our $54 price target (was $53) is based on shares trading at roughly 13x – 14x our F2015 pro forma EPS estimate.


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