TriQuint Semiconductor (NASDAQ:TQNT) is struggling to get above water today despite an upgrade from Brean Capital. Analyst, Mike Burton says the tech company is a "Buy" today, up from yesterday's "Hold" recommendation. Brean's change of opinion comes with a price-target of $16.00 – 40% upside to target as we inflame our carpal tunnel.
TriQuint provides a portfolio of radio frequency (RF) solutions. The Company is a supplier of both active and passive technologies. It designs, develop and manufacture these power amplifier, switch and filters modules in-house. It focuses on three end markets in the electronic communications system industry: mobile devices, networks, and defense & aerospace.
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Burton explains $16 in a research report, "Yesterday, RF Micro Devices (Nasdaq: RFMD) and TriQuint announced a merger which would, in our opinion, create a new stronger company and strengthen the RF space as a whole. Following the merger, we are upgrading TQNT from Hold to Buy and rolling out a $16 Price Target, as we believe the merger will create a company with considerable scale and a greatly improved operating model. TQNT's stock is now tied to RFMD's due to the deal - since we see ~35% upside to RFMD over the next 7 months to ~$9.50 (our 12-month price target is $10) (to when the deal is completed) we would expect TQNT to be trading at 1.675 times RFMD's stock, thus our $16 target."
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Burton doesn't pick the number out of thin air. According to the terms of the deal, "TriQuint shareholders will receive 1.675 shares of the combined company, while RFMD shareholders will receive 1 share of the combined company for each TriQuint or RFMD share held by them. At the closing of the transaction, the companies will execute a one-for-four reverse stock split that will result in about 145 million shares outstanding."
The combined companies will have revenue in excess of $2 billion and synergies should allow the RFMD/TQNT to "achieve at least $150 million in cost synergies, comprising $75 million in annualized synergies at the end of the first year following the closing of the deal, and an additional $75 million exiting the second year. The transaction is expected to be accretive to adjusted earnings per share in the first full fiscal year following the closing of the transaction."
Ok let's look at what the combined companies could be worth based on sales and the peer group's average price-to-sales (P/S) ratios. For 2015, analysts see $1.03 billion in revenue for TQNT and $1.23 billion for RFMD putting total revenue at $2.25 billion. The average competitor's P/S ratio is 2.01.
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At 2.01 times sales and 145 million shares outstanding, RFMD/TQNT would be worth $31.19 per share. Now, need to undo the 4:1 reverse split to price things as they are today; so, we get $7.78 per share.
Since TQNT shareholders get 1.67 shares of the new company, the stock prices out at $13.02 based on our P/S analysis for 2015. Meanwhile, RFMD prices out at $7.78 per. Based on today's prices and our hypothetical combined price-target, RF Micro Devices offer more value as it trades at a 17.08% discount compared to 12.64% markdown for TQNT.
If our calculations are correct and Wall Street eventually prices RFMD/TQNT at the current peer group P/S based on combined revenues – whew – then investors might consider shorting TQNT and buying RFMD. If the deal goes through, then RF will have to close the discount gap, allowing investors to make the difference with little risk.
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