Option Trade 
Avago Technologies Ltd (NASDAQ:AVGO) Calls 
Wednesday, August 26, 2015

**OPTION TRADE: Buy the AVGO Oct 2015 130.000 call (AVGO151016C00130000) at approximately $2.20. Place a protective stop loss at $0.80, and a pre-determined sell at $4.50.

by Ian Harvey

August 26, 2015


The technology sector, and particularly the semiconductor arena, has had a very difficult year. A huge slowdown in personal computer sales, combined with currency headwinds and other issues, has made it a nightmare. However, there is always one that stands out, and Avago Technologies Ltd (NASDAQ: AVGO), a designer, developer and global supplier of a range of analog semiconductor devices with a focus on III-V based products, steps-up-to-the-plate, in this instance. Avago is scheduled to report earnings for the third quarter of fiscal year 2015 (3QFY15) today, August 26th, 2015 after the market closes.

Avago is expected by Earnings Whispers to report $2.20 in earnings per share (EPS) in third quarter of fiscal year 2015 (3QFY15), topping Wall Street’s estimates of $2.14. Consensus estimates portray that the chip maker’s revenue will stand at $1.74 billion.

Analysts’ forecasts imply that the company’s earnings and revenue will soar 69.84% year-on-year (YoY) and 34.88% YoY, respectively, in the quarter.

In 2QFY15, Avago reported $2.13 in EPS with $1.65 billion in revenue, which was sufficient to beat the Street’s projections of $2.01 in EPS on $1.64 billion revenue.

Avago has a solid projections surpassing record as it has beaten the earnings and revenue estimates seven times each in the last eight quarterly results.

Avago Technologies Ltd. is up 46.15% year-over-year, compared with a 5.34% loss in the S&P 500.

Positive Factors

Even though the semiconductor manufacturer is expected to report in-line earnings the future looks good, with the Broadcom acquisition. Avago agreed to acquire Broadcom Corporation (NASDAQ:BRCM) for $37 billion to be paid in both cash and stock. Once the deal is completed, the resulting company would become a dominant force in the semiconductor industry with enterprise value of $77 billion and estimated revenue of $15 billion. The resulting synergies from the merger are expected to result in savings of $750 million.

Furthermore, analysts are predicting improved performance from the company’s wireless business, which contributes nearly 35% in revenue. The segment is expected to post strong growth, mainly over the strength of the upcoming iPhone; however, it will likely be offset to some extent over the expected weakness in the wired infrastructure.

Analysts Opinions

BMO Capital Market is the most bullish on the stock with an Outperform rating and price target of $185.

Avago was upgraded to ‘Buy‘from ‘Outperform‘by Credit Agricole analysts on Tuesday. The broker also set its price target on the stock at $150.

The Street is mostly bullish on Avago stock. According to Bloomberg, 19 analysts rate the stock a Buy, two recommend a Hold, and two suggest a Sell. The 12-month consensus price target is $162.75, representing 47.6% upside on the stock, which is currently trading at $108.51.

Harvey’s Options Volatility Indicator


The company should report a strong quarter, which will surpass analysts' estimates. The company’s decision to acquire Broadcom will make it one of the dominant chip manufacturers with a very diverse portfolio of product offerings.

The weakness in wired infrastructure is temporary and it is not expected that it will be significant enough to completely negate the results for the wireless business.

Avago has given an impressive performance in the past quarters, and with the upcoming merger providing strong future prospects, coupled with the recent weakness in the stock price, has made Avago an attractive option call.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the AVGO Oct 2015 130.000 call (AVGO151016C00130000) at approximately $2.20. Place a protective stop loss at $0.80, and a pre-determined sell at $4.50.

”Success is simple. Do what's right, the right way, at the right time.”

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Options traders win because they are successful.

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