CommScope's play for Arris induced some head-scratching early on, but some analysts are starting to see more upside with respect to the deal's product strategy and bottom-line potential as it approaches the finish line.
Among them, Raymond James analyst Simon Leopold has upgraded his rating on CommScope to a "Strong Buy" -- up from "Outperform" -- under the belief that the earnings accretion from the Arris deal is "underappreciated," and that CommScope will be in good position to profit from the 5G transition.
In a note issued Wednesday, Leopold held that the Arris deal will provide at least 40% accretion in 2020, compared with CommScope's forecast for over 30%, and at the high end of a somewhat wide range from analysts that falls as low as 25% and goes as high as 43%.
Leopold said the wide, variable range on earnings accretion is partly due to an underappreciation that falling memory costs will have a materially positive effect on Arris's profitability.
The big risk is the debt that CommScope is taking on with the deal, though the company believes it can de-lever quickly, forecasting that the combined company will generate about $1 billion in cash flow from operations.
Leopold also believes that CommScope will have a solid play in 5G, which he views as a "freight train, not a bullet; it is slow to leave the station, but may be unstoppable."
Notably, the analyst doesn't buy the argument that CommScope will be at a disadvantage if a sizable number of 5G radios feature integrated antennas that would come from an OEM (original equipment manufacturer) rather than from a third party such as CommScope.
"First, integrated antennas are most likely used with millimeter spectrum known as high band (> 6 GHz), but 5G networks will require an as yet undetermined mix of low-band, mid-band and high-band," he said. "So, not only will the number of antennas increase dramatically, so will the need for the associated cabling and apparatus, which CommScope also sells."
CommScope will also be aided by a partnership with Nokia that will have CommScope integrate its antennas with Nokia radios, he wrote, adding that he expects 5G to aid growth at CommScope in 2020.
Leopold has set a $32 target on CommScope shares, which climbed 89 cents (3.9%) to $23.72 each in Wednesday morning trading.
- Memory Pricing Improvements Aid Arris-CommScope Deal
- Arris Deal 'on Track' to Close by Mid-Year, CommScope CEO Says
- Sale of Arris Set-Top Box Biz 'On the Table' for CommScope – Analyst
- Arris Flirted With Handful of Potential Suitors
- Is Arris the Answer to CommScope's Pain?
- CommScope Puts Up $7.4B for Arris
— Jeff Baumgartner, Senior Editor, Light Reading