A Stock That Even Apple Might Envy

05/28/2012 12:15 pm EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Missed your chance to buy Apple before it went parabolic? Don't fret, here's a company that is well attached to the iStock's coattails, writes Ian Wyatt of Top Stock Insights.

For those who wished they bought Apple (AAPL) a year ago, we suggest you now consider Avago (AVGO), a well established company that operates in two strong secular trends that we like—smartphones and network expansion

Last year, the company bolstered its customer base when it achieved big contract wins with Apple, which tapped Avago to build custom technology for the iPhone 4. Avago delivered that technology with the ACPM-7181—a unique and valuable part of the iPhone 4S. This custom device merged the functionality previously implemented by three components.

Avago's team achieved parts reduction by developing a custom pressure application measurement that can support 2G and 3G cellular technologies across multiple bands. Its key design win in the iPhone last year could make it a prime choice for future iPads and the iPhone 5.

While the industry's future opportunity is huge, Avago's financials are already firing on all cylinders. Revenue was $2.3 billion for 2011, an increase of 12% from $2.1 billion in 2010. They also achieved record operating income, record total assets and paid their debt down to zero. The record profit and no debt are essential to future growth, and will enable management to continue their generous cash dividend.

Along with sturdy financials, Avago is one of the more shareholder-friendly names in high-growth tech. Not only does Avago pay a 1.5% dividend, it has increased the payout during the past two years. And management declared a 13-cent dividend in March of this year.

Avago paid a 12-cent quarterly cash dividend last year, and it frequently buys back its shares, which is essentially another form of repayment to shareholders. A buyback doesn't grant the shareholder more cash, but it does support the stock by decreasing shares outstanding.

Recently, the board of directors authorized another repurchase of up to 15 million shares, or about 6.3% of total shares outstanding. This was a continuation of a share purchase program from last year. What's more interesting is that management did most of their share buying when the stock was at $33.66.

Analysts expect Avago to earn $2.48 per share in 2012 and $2.88 in 2013. Based on those two estimates, the stock trades at 13.8 times current and 12 times forward EPS. The historical P/E for Avago is a tad under 16. If we apply that multiple to forward EPS, the result is a $46 price target.

Currently, 16 analysts follow the stock, and 14 have a buy rating with a median target price of $42. The average of the two is $44, and that is our price target. But even that target price seems low.

I added Avago to the Top Stock Insights portfolio because of its value and its exposure to the secular growth in the wireless space—and the potential to win design contracts for future iPhones and iPads. We are looking for explosive gains into 2013.

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