UBS Securities downgrades Arris Group to ‘neutral’

UBS Securities downgraded rating of communications technology company Arris Group Inc. to Neutral from Buy on Friday, on weaker-than-expected outlook and profitability. The brokerage lowered its price target to $10.75 from $14.

UBS Securities said Arris reported a weaker than expected business outlook. The company expects third quarter of 2010 sales of $270 million to $290 million vs. consensus expectations of $300 million.

Of the company’s limited forward looking revenue indicators, business-to-business and deferred revenues were both weaker than expected, below 1 at 0.92 and down 15 percent quarter-over-quarter, respectively. EPS was guided below expectations to $0.16-$0.20 vs. $0.27 on mix, UBS Securities said in a report to its clients.

“Arris has limited visibility on its product mix. It believes cable modem termination system (CMTS) demand will pick up after 3Q, but it remains unclear when the uptick will happen. Meanwhile, the mix shift from CMTS, toward embedded multimedia terminal adaptors (EMTA), pressures margins and earnings power,” said Nikos Theodosopoulos, an analyst at UBS.

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The brokerage lowered its gross margin forecast estimating more than 40 percent in 2010 and 2011 vs. prior more than 42 percent and third quarter guidance for the mid to upper 30 percent range.

The brokerage lowered its calendar 2010 EPS estimate, excluding options, of Arris to $0.85 on sales of $1.10 billion from $1.01 on sales of $1.14 billion and its calendar 2011 estimate to $0.90 on sales of $1.19 billion from $1.06 on sales of $1.20 billion.

The analyst said the weaker order trends with business-to-business below 1 and deferred revenues declining, with an unfavorable mix shift lowers his forecast. CMTS may uptick but visibility is limited.

Arris shares closed Friday down 3.02 percent at $9.32 on the Nasdaq, while in after-hours the stock rose 0.52 percent at $9.37.