Despite a 15-percent decline throughout 2017, ARRIS International plc ARRS was still favorably viewed by some on the Street, but on Tuesday a notable analyst changed their previously bullish thesis.
The Analyst
Morgan Stanley's Meta Marshall downgraded Arris' stock rating from Overweight to Equal-weight with a price target lowered from $34 to $31.
The Thesis
The bullish case for owning Arris was based on expectations for the company to show EPS leverage as the DOCSIS upgrade created an attractive business mix shift, Marshall said in a note. (See Marshall's track record here.)
But now the telecom company has shown a lack of ability to deliver upward estimate revisions, which may put a pause to any valuation growth — and this trend will likely continue for at least the next six to nine months, the analyst said.
Arris' gross margins have fallen 130 basis points in the past year due to a significant increase in DRAM pricing coupled with the company's difficulties in passing on the price increase to customers, Marshall said. The trend of increasing DRAM prices is likely to continue for at least the next six months, which implies it will be difficult for the company to avoid incremental gross margin pressures in 2018, the analyst said.
Another bullish catalyst was a favorable view of the Ruckus/ICX acquisition, but the upside from the transaction won't be seen until the second half of 2018, according to Morgan Stanley.
Price Action
Arris was trading nearly flat as of midday Tuesday.
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Photo courtesy of Arris.
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