Don't let it get away!
Keep track of the stocks that matter to you.
Help yourself with the Fool's FREE and easy new watchlist service today.
Communications chip designer Avago Technologies (Nasdaq: AVGO ) delivered a fine but unimpressive fourth quarter by the usual numbers. Revenue climbed 4% from the previous quarter's levels to $572 million, and non-GAAP earnings took a healthier 24% jump to $0.76 per share. So far, so ho-hum: The earnings were a positive surprise to your average analyst, while sales fell a bit short.
But what Avago does best these days is to generate cash. Historically strong gross margins show pricing power, and fairly stable inventory levels amid several quarters of impressive sales growth prove the customer demand remains strong. And with a mostly fixed cost structure in place, almost every penny of extra income flows right down to the cash accounts.
Avago produced positive free cash flows a year ago, even as net income was printed in red ink. In the fourth quarter, free cash flow increased to $187 million, which is a 63% jump from the previous quarter and a downright ridiculous change from the year-ago period's $26 million. And the company has used its cash-producing powers to pay off all of its long-term debt.
So where does Avago go from here? The stock has already jumped about 79% over the past year. That's in large part thanks to wins in numerous hot sectors and companies getting huge growth for their products. For example, Avago has wins in Samsung and Motorola (NYSE: MOT ) smartphones. Aside from mobile devices, Avago is also part of the growing networking sector: Its chips are seen in Cisco Systems (Nasdaq: CSCO ) network switches and many other tasty design wins. Some of the most impressive wins, such as shipping power controllers and signal amplifiers for the Motorola Droid X and Samsung Galaxy S phones, have appeared very recently, perhaps indicating a company on the upswing.
Then again, you could say the same thing about close competitors Skyworks Solutions (Nasdaq: SWKS ) and TriQuint Semiconductor (Nasdaq: TQNT ) as well, both of which are supplying various chips to the market's hottest phones -- often in conjunction with Avago. Given how many chips you need to produce a good smartphone, I think it's safe to say that this market is big enough to support several high-growth suppliers. And the smartphone market itself is expanding at the speed of 4G radio waves.
I think the market is missing Avago's cash-cow aspect in today's modest sell-off. That's why I'm adding this stock to my All-Star Motley Fool CAPS portfolio with an outperform rating. You can do the same in just a couple of clicks.