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Analyst Keeps Rating, Lowers Estimates on Arris

EARLIER:Arris Stock Drops on Q2 Warning

Raymond James analyst Simon Leopold kept his “Strong Buy” rating on Arris but tweaked his revenue estimates and stock price target after the supplier of broadband and video gear lowered second quarter guidance due to greater than anticipated "headwinds” caused by industry consolidation and the strengthening U.S. dollar.

“Although we would have preferred better news, we continue to be confident that cable spending remains healthy over the long term, driven by a number of factors including a structural shift in the architecture towards IP and continued traffic growth,” Leopold wrote. “Faster adoption of IP networks would alter ARRIS' mix, driving faster growth of high margin CMTS [cable modem termination system[ offset by slowing low margin STB [set-top box] sales. We see long-term sales growth of 3-6% and expect the company to provide strong cash flow and likely delever and buy back shares.

Leopold recently trimmed his estimates on Arris due to expected lumpiness in customer spending driven by ongoing consolidation (Charter’s proposed acquisitions of Time Warner Cable and Bright House Networks; and the pending AT&T-DirecTV merger), and did so again following the company’s Q2 warning issued late last week. Arris now forecasts sales of $1.25 billion to $1.26 billion, below prior guidance for $1,27 billion to $1.31 billion, with non-GAAP earnings per share of $0.51-0.55, off from prior guidance of $0.53-0.58.

Raymond James is now forecasting 2015 sales of $5.13 billion to $5.22 billion, with EPS of $2.40, from $2.52. The firm also lowered its price target from $43, to $42, “which still offers significant upside potential.”

Leopold also noted that Arris shares still reflect uncertainty with respect to the proposed merger of Arris and Pace plc. “The market values Pace shares about 8% below the implied offer,” he wrote. “We believe the deal gains approval and provides at least $0.45 of EPS accretion.”