Citi: Avago Technologies Remains Top Pick (AVGO)

Citi believes that Avago Technologies (NASDAQ: AVGO) is a top pick after iFixit's teardown of the Apple (NASDAQ: AAPL) iPhone for Verizon (NYSE: VZ) shows parts made by Avago.

Citi is very optimistic on the company after the news, forecasting, “VZ iPhone could add $12M to AVGO's C11 revenue. If AVGO is also in iPhone5, this would add another $35M. These wins respectively cover 12%/36% of our current model's $98M projected wireless growth for C11. Every $25M/yr in sales adds a nickel to EPS. We currently project AVGO will generate $2.49 EPS in C11, above the Street's $2.42.” Additionally, Citi writes, “the GSM/CDMA architecture revealed in the teardown increases the likelihood that Apple will use a similar setup for iPhone 5.”

Citi justified its top pick thesis by stating, “1) AVGO should grow 10%-12%/yr helped by wireless (39%) and wireline (24%) trends, outpacing Street's 9%/7% in F11/F12, 2) 12x PE should expand to ~15x as KKR/SilverLake reduce ownership from current ~31% level, and 3) new products likely push GMs higher than our flat modeling; 1pnt = 7c EPS.”

Citi maintains its $36.00 price target.

Shares of Avago closed at $30.79 on Monday.