Cavium: Bulls Say Stay the Course, Bears See Valuation Stretched

Shares of network processor maker Cavium (CAVM) are down 45 cents, or 1.6%, at $28.03, after the company last night cut its outlook for the current quarter, citing broad-based weakness among different client groups, and also a more pronounced effect from one of Cavium’s customers’s inventory adjustments.�

The bulls are inclined to stay the course today, still sounding fairly bullish despite slashing estimates:

Hans Mosesmann, Raymond James: Reiterates an Outperform rating, while cutting his price target to $33 from $35. The sell-off last night was a “knee-jerk” over-reactions to an industry-wide inventory correction. “The pre-announcement does not come as a surprise to us, especially given similar news from telco/networking suppliers Altera and Xilinx. Similar to these companies, Cavium is under shipping demand as customers are utilizing existing inventory while overall end-market demand across multiple segments remains soft. While Cavium�s guidance reduction of ~650 bp is slightly larger than Altera�s (550 bp) and Xilinx� (500 bp), we note that Cavium also saw a larger than expected impact from a contract manufacturer hub transition for Cisco. We believe all these issues are transient, and should not impact the company�s long-term growth prospects.” Mosesmann cut his 2012 non-GAAP EPS estimate, excluding the cost of stock-based compensation, to 90 cents a share from $1.05.�

Sandeep Shyamsukha, Auriga Securities: reiterates a Buy rating and a $37 price target. He urges investors to look past the current shortfall to growth that lies ahead. “Our analysis suggests that the company should resume modest growth in 1Q12 on growth in CSCO/enterprise and see accelerated growth from 2Q12 on new product launches at CSCO and multiple base station vendors. We expect CAVM to grow the top-line at 25%-35% CAGR over the next five years on the strength of its existing traction in enterprise/service provider segments, and growth potential of new products for small cells (Octeon Fusion) and switch/routers (Neuron search co-processor).”�Shyamsukha cut his 2012 EPS estimate to 90 cents per share from a prior $1.19.�

One of the spoilers is Daniel Berenbaum with MKM Partners, who today cut his “fair-value” estimate to $23 from $27 after cutting his 2012 EPS estimate to 81 cents from $1.21. Too much of the payoff is a long, long way off, he writes.�

CAVM�s technology leadership in multi-core processors is unquestioned, and communications end markets will likely return to growth at some point in 2012. However, with disappointing guidance followed by negative pre-announcements for both 3Q and 4Q, it increasingly seems that the realization of CAVM�s growth prospects is being pushed out to 2014 � beyond the horizon of most investors. Strong product positioning keeps us from becoming overly negative, but it is difficult for us to find a reason to put new money to work at current levels.