Microsemi Takeover 'Would Be Early,' But Co. Could Become M&A Asset 'Shortly'

RBC Capital Markets thinks Microsemi Corporation (NASDAQ: MSCC) is definitely a takeover candidate. However, it should approach a leverage of 3.0 or lower. Therefore, the firm thinks it would be early to conclude any possible deal pointing out the current leverage of 3.7x.

Analysts Mitch Steves and Amit Daryanani noted the reports indicating Microsemi is looking for a divestment. They rated the company's asset quality as high to own. While indicating the stock as a "top pick," the brokerage has a target price of $48.00 on the stock, implying close to a 20 percent upside potential from the current levels.

"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 (Texas Instruments Incorporated (NASDAQ: TXN), Broadcom Ltd (NASDAQ: AVGO), Maxim Integrated Products Inc. (NASDAQ: MXIM) — we think TXN makes the most sense)," RBC told clients in a research note.

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On the prospects of revenue growth, the brokerage sees SSD revenue to grow in the next four-year period fueled by unit growth with Enterprise SSD Unit CAGR of 19.7 percent during the periods of 2015 to 2020.

The firm thinks that Microsemi is moving toward a revenue run-rate of $2 billion. The analyst sees that there is only small number of companies with a 60 percent or above gross margin profile along with revenue uptick. The firm noted that 63 percent gross margin and 33 percent operating margin are attractive.

RBC thinks that the company is on track to achieve a leverage of 3x. Therefore, it would be an attractive stock for a takeover candidate.

At last check, the stock was up 2.13 percent at $40.27.

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