Avago Technologies (AVGO, Financial) ended the last fiscal year on a strong note. The company posted a handsome increase in revenue, which exceeded its expectations and guidance. Avago did well on the back of strong growth in the wireless segment. Moreover, the company is seeing strong product ramp up of new smartphones. In addition, Avago is largely counting on the recent acquisition of PLX to improve its performance in the long run. Let us take a closer look at the overall business of Avago.
Making the right moves
Avago is trading at impressive valuation levels. The company is majorly focusing on increase it profit margins. To facilitate this, Avago is focusing on key core assets and is selling some non-core assets which will add more revenue to the company. The recent sale of it LSI flash and Axxia business has helped it in a good way contributing good cash to it, driving its liquidity. As Avago exits from LSI completely it will focus mainly on the completion of the integration program in 2015. Avago has plans to direct funds arising from this sale in R&D of its core businesses to explore more opportunities.
Good improvement in the Wireless segment is expected to be a key growth driver for Avago in 2015. With the new LTE platform rolling, Avago is expecting sustained demand from a large North American smartphone OEM. Not only in the wireless but Avago is soaring well in the wired infrastructure as well. It is witnessing significant strength in its ASIC business. The performance across this segment has been consistent from the third quarter and in line with this, Avago is expecting this to further benefit the company in future. Its strength is largely supported by the growth in Ethernet switching and routing products.
Headwinds and beyond
However, Avago thinks that its fibre optics business might face certain headwinds in 2015 which can offset the gains arising from its other two segments. Besides this, it is expecting stable enterprise and data center Ethernet Switching market. Though the fibre segment is expected to be soft overall but Avago is expecting some recovery in parallel optic shipments into routers.
Avago’s enterprise business is also expected to benefit largely from PLX acquisition that Avago recently completed. Besides Avago’s enterprise products, the portfolio will now also include products from PLX. PLX benefitted the company impressively in the last quarter, Avago thinks better synergies arising from this acquisition in future.
Now moving to Avago’s server and storage connectivity business, it is expecting the data centre and enterprise demands to rise and drive growth in this segment. This is also expected to drive the HDD business similarly.
Conclusion
The stock is very expensive with a trailing P/E of 106.14 this is mainly due to the recent sale of its LSI and Axxia business. The forward P/E of 13.21 shows steady earnings growth in the near future. The stock can further attract the investors with its impressive profit margin of 6.16%. Not only in the near term but also the stock is showing strong long term strength. Its earnings are growing with a CAGR of 31.09% for the next five years as compared to industry average of 19.02%. Considering all these valuation levels I would like to suggest the investors that Avago Technologies is a good pick as of now.
