Amid Weak iPhone Sales, Sterne Agee CRT Cuts Avago's Estimates

Avago Technologies Ltd, acquired recently by Broadcom Ltd (NASDAQ: AVGO), is scheduled to report its F2Q16 results on June 2.

Douglas Freedman of Sterne Agee CRT maintained a Buy rating on Avago Technologies, with a price target of $185.

Estimates Lowered

Freedman mentioned that the April quarter (F2Q16) revenue estimate had been lowered by $44 million to $3.51 billion, and now stood below the consensus forecast of $3.55 billion. The EPS estimate has been lowered by $0.02 to $2.36.

The analyst explained the estimate cut was due to the channel inventory adjustment for Apple Inc. (NASDAQ: AAPL)'s iPhone 6s, which is now estimated at 2.5 million units.

Related Link: BTIG's Walter Piecyk Talks Apple's Decline, Questions iPhone 7's Capability To Convince Customers To Upgrade

The estimate cut was also prompted by weaker-than-anticipated HDD storage demand, revealed by the recent earnings of HDD vendors.

“We believe weakness for the latest Samsung Galaxy launch, as suggested by recent data points, has already been well reflected in our and consensus estimates,” Freedman stated.

The analyst also expects a limited impact of the soft China handset demand, since that market continues to be “relatively underserved” by Avago Technologies.

The Silver Lining

Despite the near-term volatility, Freedman said he continues to favor the company due to expectations of an uptick in Wireless during F2H16, driven by content increase of 20 percent for the iPhone 7.

The analyst also pointed out that demand trend for the core optical network business was likely to remain robust, while strategic divestitures were expected to optimize the company’s cost structure toward the synergy target of $750 million.

In fact, despite the near-term softness, Freedman estimates 15 percent quarter-on-quarter growth in the Wireless business in F2H16, driven by the iPhone 7 cycle.