Updating Avago (AVGO) Model for Merger - Susquehanna

Susquehanna analyst, Chris Caso, updated his Avago Technologies (NASDAQ: AVGO) model for the Broadcom merger. The weakness at AAPL has impacted both Broadcom as well as Avago but much of that is already in the share price and management's biggest earnings lever going forward is cost control. No change to Positive rating or $165 PT.

Near-term AAPL weakness notwithstanding, AVGO has a very clear path toward $12 in earnings power, with the biggest driver toward that goal being the cost reductions that are fully in management’s control. The current stock price likely reflects the market’s concern regarding companies taking on leverage amid the significant macro uncertainty. Nonetheless, with the main driver of cash flow and earnings within the management’s scope of control and the eventual earnings power so high, this creates a very attractive risk/reward.

The new model reflects the addition of BRCM as well as some adjustments to their model for BRCM and AVGO to account for slower AAPL demand. BRCM reported 4Q revenue of $2.053 bln, slightly below their estimate and consensus of $2.1 bln, and likely included some shortfall from AAPL. The lower contribution from BRCM to the AVGO model results in a $225 mln reduction to our combined AVGO/BRCM revenue model for C16. The revised estimate now assumes an additional 15% Q/ Q decline in the April quarter (compared to an earlier expectation for a 5% Q/Q rise in April).

Downside risk is $110 (~10x earnings power of $11.35, near the low end of the company's historical trading range over the past five years).

For an analyst ratings summary and ratings history on Avago Technologies click here. For more ratings news on Avago Technologies click here.

Shares of Avago Technologies closed at $128.67 yesterday.

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