Possible ~50% Upside for Microsemi (MSCC) - RBC Capital

RBC Capital analyst, Amit Daryanani, believes the PMC-Sierra acquisition could drive nearly 50% upside to Microsemi Corporation (NASDAQ: MSCC) share price for the following 4 reasons:

1) potential for $0.90–1.00 in CY17E EPS accretion or +25%;

2) revenue mix will become more diversified with 21% of revenue tied to storage;

3) the company will likely exceed its 60/30 margin target post closing (~64%/32% in CY17); and

4) we believe the main investor concerns are higher leverage and PMC's volatile revenue performance over the last five years. Importantly, assuming EBITDA of ~$600M/year is used to pay down debt rapidly and move from ~4.3x to 3.3x over the next 18 months,

Daryanani believes the transaction will create an opportunity for Microsemi to deliver accretion of ~$0.50 in CY16 (February 1 close) with total CY17 EPS accretion of $0.90–1.00. With these estimates in mind and the current $3.61 estimate for Microsemi standalone CY17 EPS, the year would come in at roughly $4.50.

To add a layer of conservatism, if you apply a 12x multiple and discount CY17E EPS by 10%, there is the potential for a share price valuation of ~$48–54 exiting calendar year 2016.

He believes MSCC could trade at 12x earnings which equates to a $54 valuation on $4.50 in CY17 EPS.

No change to Outperform rating and $45 price target.

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 $36.67 yesterday.

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