Microsemi (MSCC) Will Be 'Solid Target' Once Leverage is Lower, Says RBC

October 21, 2016 3:48 PM EDT
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RBC analyst Mitch Steves commented on rumors that Microsemi Corporation (NASDAQ: MSCC) is being shopped as an M&A target. In his view, potential M&A is "early" but he thinks Microsemi will be a "solid target" once leverage approaches 3.0x or lower.

Steves explained, "According to recent news reports (StreetInsider, unsubstantiated) Microsemi is currently exploring a sale. At this point, we think it is 'early' given leverage is currently at 3.7x however, we view MSCC as a high quality asset to own once leverage comes down to 3.0x or less. In addition, if we look at the semiconductor universe as a whole, we think larger companies will need to target mid-cap companies such as MSCC and the margin profile and current valuation is likely attractive to a wide range of potential acquirers (TXN, AVGO, MXIM - we think TXN makes the most sense)."

The analyst continued, "Net Net: while we think the news is 'early' at this point, we think MSCC will become an attractive M&A asset shortly (~2-3 quarters) and believe larger semiconductor companies will target mid-sized firms such as Microsemi if given the right opportunity."

Steves added, "When we look across the semiconductor universe we find a small number of companies that currently have 60%+ gross margin profiles with top-line growth. In addition, Microsemi is approaching a revenue run-rate of $2B and we think its gross & operating model of ~63%/33% at this point are attractive. In addition, with a multiple set at ~10x CY17 earnings, the accretion math for companies such as TXN would be positive."

RBC Capital has a Top Pick rating on Microsemi Corporation (NASDAQ: MSCC) with a price target of $48.

For an analyst ratings summary and ratings history on Microsemi Corporation click here. For more ratings news on Microsemi Corporation click here.

Shares of Microsemi Corporation closed at $38.26 yesterday.

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