Avago Technologies (AVGO, Financial) wrapped up fiscal 2014 on a strong note. Looking ahead, Avago anticipates mid-single digit growth in enterprise storage and low-to-mid single digit growth in industrial. The company anticipates low single-digit sequential growth in revenue for the first-quarter 2015. Let us look at the growth potential for Avago under these market segments in 2015 and beyond.
Growth drivers
Avago looks solid on its FBAR associated products and RF Front End Modules. These products are attracting great amount of deal from Chinese LTE smartphone OEMs. FBAR related products and front end modules have been a boon for its wireless segment off late. Also, the rise in the new smartphones across the world and fresh content offered by the North American smartphone OEMs should deliver great results for Avago in 2015.
It continues to witness a sustained demand from large North-America smartphone OEMs. This should assist the company to counterbalance the broad based seasonal decline in handset OEMs across the world. Further, the company remains on track to maximize the underlying growth in this segment. It plans to increase RF band per phone with growing LTE deployment, which will certainly drive its growth and return great money to its investors in the future.
Strong end-markets
Its wired market has a lot to offer in 2015 and in the coming years. The sophisticated bandwidth in Data Centers, 4G/LTE infrastructure expansion and Internet of Things are the talk of the town today. The continuous upgrading and innovation should drive growth for its fiber optics and AISC business. It expects a strong ramp of next generation LTE base station ASIC and large Chinese OEMs to drive growth for its wired segment.
Also, it is experiencing strength in data center Ethernet switching and routing products coupled with resuming growth in base station and high performance computing. It forecasts recovery for the parallel optic shipments into routers and call centers that should boost its fiber optic business. However, the company anticipates decline in its other Ethernet transceiver products with a pause of 40G. This could affect its results in the first-quarter 2015. Avago had very strong shipment for its 40gigabit BiDi fiber products in the last reported quarter.
In addition, Avago expects the data center and enterprise demand to drive growth for its storage connectivity and HDD businesses. These businesses are benefiting from large increase in enterprise shipments. Also, it is expected to gain from server refresh cycle. Its 12G SaaS and rate solutions are gaining traction in the market. The server and storage has grown at a double digit growth rate in the fourth-quarter. AVGO expects this segment to grow at mid-single digit in the first-quarter 2015.
Moreover, the recent acquisition of PLX should become accretive to its profit in going forward. PLX has made significant contribution to its server storage connectivity business in the fourth-quarter 2014. This business posted 15% sequential growth with 7% growth coming from PLX alone. Hence, it remains a solid investment for Avago in the future.
However, Avago is seeing softness in its industrial business. It expects mid-single digit decline for its industrial products in the first-quarter 2015 due to planned customer shutdowns in the second half of fiscal 2014. Nevertheless, the company expects this sector to recover in the second-half of 2015 and register mid-single digit sequential growth for the year. It continues to observe tight inventory at its distributors across the world. Also, its re-sales are expected to pick up pace.
Conclusion
The stock has performed fairly well in the past. The on-going development and growth in its end market, highlights a lot of growth potential for the stock in 2015 and coming years. The analysts expect its earnings to grow at CAGR of 31.09%, higher than average industry CAGR of 18.33% for the next five years. This indicates tremendous earnings growth for the stock in the long-run.
Moreover, the stock shares cheap valuation. It is trading at the trailing P/E of 113.42 and forward P/E of 14.08. It has PEG ratio of 0.48 that continues to support its growth over the years. Its balance sheet carries total cash of $1.63 billion and has total debt of $5.51 billion. Avago has operating cash flow of $1.18 billion and levered free cash flow of $5.75 billion.
