In this article, let's take a look at Avago Technologies Ltd (AVGO, Financial), a $26.07 billion market cap company, which focuses on designing and developing radio frequency devices for wireless communications applications.
Low cost
The company plans to maintain an efficient global supply chain. Also, it focuses on implementing a low-cost operating model. It is expected that the company will achieve annualized cost synergies of about $200 million by the end of fiscal 2015, through the deal with LSI acquisition that we are going to see next.
Acquisitions
In June 2014, the firm announced the future acquisition of PLX Technology, a provider of PCI Express silicon and software connectivity solutions. With the deal the Avago will benefit from a wide range of product offerings. On May, the firm completed its acquisition of LSI Corporation. This acquisition contributes to diversify the company's end-market exposure by adding enterprise storage.
India
Almost half of AVGO's employees are in Asia, a fundamental area of production to the company and we believe is a good promising market in the next future. We see an important growth in China and emerging markets as customer base is increasing.
Revenues, EPS and net income
Looking at profitability, revenues grew by 99.98% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago (-$0.48 vs $0.56). The net income decreased by 215.5% when compared to the same quarter one year prior (from $142 million to -$164 million).
Margins
The gross profit margin is considered high, at 61.38%. It has increased from the same quarter the previous year. But the net profit margin is ranked higher than 82% of the 1094 Companies in the Semiconductors industry.
Profitability
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| AVGO | Avago | 8.55 |
| TXN | Texas Instruments Inc | 23.47 |
| MU | Micron Technology Inc | 31.49 |
| INTC | Intel Corp | 18.58 |
| Â | Industry Median | 4.4 |
The company has a current ROE of 8.55% which is higher than the industry median but lower than the one exhibit by Intel (INTC, Financial) and Texas Instruments (TXN, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Micron (MU, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 103.9x, trading at a premium compared to an average of 66.7x for the industry. To use another metric, its price-to-book ratio of 8.47x indicates a premium versus the industry average of 1.93x while the price-to-sales ratio of 7.92x is above the industry average of 1.79x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $62,411, which represents a 44.3% compound annual growth rate (CAGR).
Final Comment
As outlined in the article, the company will have cost synergies as well as a greater scale from the deal with LSI. We saw strengths on revenue´s growth, good profit margins and a tremendous increase in stock price during the past five year. This analysis make me feel bullish on this stock.
Hedge fund gurus like Ken Heebner (Trades, Portfolio) and Jim Simons (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
