IT Hardware Stocks

Avago Technologies Ltd Valuation – January 2016 Update $AVGO

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – November 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Avago Technologies Ltd (AVGO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Avago Technologies Limited (Avago) is a designer, developer and global supplier of a range of analog semiconductor devices. The Company focuses on III-V based products and complex digital and mixed signal complementary metal oxide semiconductor (CMOS) based devices. The Company operates through four segments: wireless communications, enterprise storage, wired infrastructure and industrial & other. The wireless communications segment supports the wireless industry with a range of radio frequency (RF) semiconductor devices. The enterprise storage segment consists of LSI Corporation’s (LSI’s) storage products and PLX Technology, Inc.’s (PLX’s) peripheral component interconnect express (PCIe) switches and bridges. The wired infrastructure segment supplies transceivers that receive and transmit information along optical fibers in the storage and Ethernet networking markets. The industrial & other segment provides a range of products for the general industrial and automotive markets.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AVGO – January 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $35,769,459,920 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.37 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -2805.36% Fail
6. Moderate PEmg Ratio PEmg < 20 25.62 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 7.56 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 3.37 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.47 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

AVGO value Chart January 2016

EPSmg $5.04
MG Growth Estimate 15.00%
MG Value $193.91
Opinion Undervalued
MG Value based on 3% Growth $73.03
MG Value based on 0% Growth $42.81
Market Implied Growth Rate 8.56%
Current Price $129.04
% of Intrinsic Value 66.55%

Avago Technologies Ltd qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth or stability over the last ten years, the short dividend history, and the high PEmg and PB ratios.  The Enterprising Investor is only concerned by the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.67 in 2011 to an estimated $5.04 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 8.56% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Avago Technologies Ltd (AVGO)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

AVGO Charts January 2016

Net Current Asset Value (NCAV) -$7.62
Graham Number $59.78
PEmg 25.62
Current Ratio 3.37
PB Ratio 7.56
Dividend Yield 1.20%
Number of Consecutive Years of Dividend Growth 6

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Oct15
Total Current Assets $3,775,000,000
Total Current Liabilities $1,119,000,000
Long-Term Debt $3,903,000,000
Total Assets $10,592,000,000
Intangible Assets $4,951,000,000
Total Liabilities $5,878,000,000
Shares Outstanding (Diluted Average) 276,000,000

Earnings Per Share History

Next Fiscal Year Estimate $9.31
Oct15 $4.85
Oct14 $0.99
Oct13 $2.19
Oct12 $2.25
Oct11 $2.19
Oct10 $1.69
Oct09 -$0.20
Oct08 $0.38
Oct07 -$0.74

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.04
Oct15 $2.76
Oct14 $1.77
Oct13 $1.98
Oct12 $1.67
Oct11 $1.14
Oct10 $0.49
Oct09 -$0.11
Oct08 -$0.07
Oct07 -$0.25

Recommended Reading:

Other ModernGraham posts about the company

The Best Stocks of the IT Hardware Industry – September 2015
19 Best Stocks For Value Investors This Week – 8/29/15
Avago Technologies Ltd Analysis – Initial Coverage $AVGO

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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