We downgrade our recommendation on Arris Enterprises Inc. (ARRS - Analyst Report) to Neutral based on its high level of current valuation. The stock price has soared nearly 35% in the last year and currently provides limited opportunity for above-market gain. Arris will report its third-quarter 2013 financial results on Oct 30, after the closing bell. Arris currently has a Zacks Rank #3 (Hold).
Why the Downgrade?
Arris is solely dependent on cable operators for revenues. Lack of industry diversification may result in limited business prospects. Potential shifts in industry dynamics may adversely impact cable TV service providers.
This is evident from the fact that large telecom carriers in the U.S. are increasingly expanding their high-speed fiber-based network and satellite TV providers are also upgrading their networks. Cable MSOs are gradually losing their basic video customers to low-cost satellite TV and Internet video service providers.
Customer concentration remains high for the company. In the previous quarter, the two largest cable TV operators, namely, Comcast Corp. (CMCSA - Analyst Report) and Time Warner Cable Inc. (TWC - Analyst Report) together accounted for 38.8% of the total revenue of Arris. Loss of any of these customers would materially impact the company’s top-line growth.
Meanwhile, the acquisition of the Home business division of Motorola mobility, a subsidiary of Google Inc. (GOOG), has placed Arris as the leading player in the broadband DOCSIS 3.0 CPE market. In the second quarter of 2013, the CPE segment of Arris generated $663 million of total revenue, up by a whopping 344% year over year. The company stated that 90% of its total CPE shipment was for the DOCSIS 3.0 network.