Avago Technologies (AVGO, Financial) has significantly improved its operating model by selling two of its non-core and underperforming business divisions, the Axxia and LSI flash businesses which were not delivering at par with the company expectations and by acquiring potential performers. Avago received nearly $450 million in cash from the sale of its flash memory chip business to Seagate Technology (STX, Financial) and also received approximately $650 million in cash from the Axxia’s networking business sales to Intel Corporation (INTC, Financial).
Avago witnessed healthy growth for its wireless segment primarily driven by the accelerated adoption of the new smartphone generation and a major push for a key smartphone OEM in North America. Avago also gained from a major enhancement in its content, significant traction for its FBAR-linked products particularly from several key Chinese LTE smartphone OEMs.
The sell-off of two loss making businesses of Avago is expected to reduce the loss of the company and prevent its balance sheet from becoming debt-laden. Also, the quick acceptance of innovative smartphones in the market is estimated to drive significant both top line and bottom line for the company.
Growth across the board
Considering the fiber optics segment, Avago expanded fairly from the last quarter. Particularly, it had extremely robust shipments of its 40 gigabit BiDi fiber products with its key customer developing their supply chain to enable their innovative product launch. It also gained from solid demand for 16G fiber channel transceivers leveraged in storage markets, and highly robust fiber to the home deployment in China.
In enterprise storage, Avago’s storage connectivity, server and hard disk drive product line offerings are also expected to include products from its latest PLX acquisitions worth nearly $308 million in cash, adding to its server storage connectivity capabilities.
The fiber optics segment of Avago demonstrated better performance over previous quarter and witnessed healthy demand for its 16G fiber channel transceivers and 40 gigabit BiDi fiber products.
The industrial segment illustrated mixed performance and reported poor resales in all regions including 13% decline in Japan, 6% fall in Europe and 9% decline in Asia Pacific except in America where re-sales jumped 2%.
Avago declared its day sales outstanding of 42 days which increased from the previous quarter’s 39 days owing to revenue linearity in the quarter. It was left with $519 million of inventory by the quarter end. Days on hand reduced nine days from the third quarter to 70 days during the fourth quarter primarily due to the lowering of its Wireless segment inventory. Avago concluded the quarter with $1.6 billion of cash balance and delivered $381 million in operational cash flow.
However, the continued decline of the company’s industrial segment in several of its key operating regions is concerning still, the balance sheet of Avago looks solid with significant free cash flows to plan for other key investments in the future.
On Sept. 30, 2014, Avago paid a quarterly cash dividend of $0.32 per ordinary share, an increase of approximately $0.03 from the previous quarter and costing $81 million of cash to the company. Avago’s solid balance sheet has allowed it to increase the dividend each quarter and in line with its continued commitment to deliver enhanced shareholder value.
Going forward to the fiscal first quarter of 2015, analysts remain positive about the stock growth with Avago forecasted to deliver an enormous 113% sales expansion and 91% growth in earnings. Analysts tag Avago with an “A-rated strong buy” and ahead of all the top semiconductor companies.
Conclusion
However, Avago trades at a premium valuation, but it is estimated to outperform the overall industry, making it an intelligent buying option.
Finally, investors are advised to invest in Avago Technologies Limited looking at the satisfactory company valuations with trailing P/E and forward P/E of 111.49 and 13.87 respectively. The PEG ratio of 0.47 indicate excellent company growth and better than the industry’s average of 1.05. The profit margin of 6.16% is impressive.
