Image source: Arris International.
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What: Shares of ARRIS International (NASDAQ: ARRS) rose 30% in July 2016, according to data from S&P Global Market Intelligence. The maker of equipment for both the service provider and customer sides of the cable industry started the month with a 13% rise related to an agreement with Comcast (NASDAQ: CMCSA)and finished strong thanks to a fine second-quarter earnings report.
So what: Arris sidled up closer to major client Comcast via a warrant agreement. The cable giant already accounts for roughly 25% of Arris' sales, but this deal could add quarterly orders of another $100 million. That works out to something like a 7% boost to Arris' total revenues. Over the next two years, Comcast has the ability to grab up to 8 million Arris shares in exchange for certain sales and product mix requirements. At worst, that could lead to 4% share dilution in two years.
In the second quarter, Arris reported earnings of $0.84 per share on $1.73 billion in top-line sales. The bottom-line result was 29% above Wall Street's best guess, and shares raced as much as 19% higher the next day.
Now what: The cable modem specialist is standing on an impressive runway right now. Yet the stock has fallen 11% year to date, even including the strong July performance.
Low share prices and strong growth prospects add up to Arris shares selling for just 8.5 times estimated forward earnings, and the stock's PEG ratio stands at a bargain-basement 0.4. As a reminder, low PEG ratios point to shares that may be undervalued against their five-year future earnings growth projections, and a value of 1.0 normally indicates a fair valuation.
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In short, Arris looks poised to climb out of this dark hole.
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