QLogic Rises on Sale Speculations, Teams Up with Qatalyst

QLogic Corp.QLGC shares gained nearly 7% in Friday's trading session, after a Bloomberg report revealed that this networking infrastructure company has teamed up with a financial adviser- Qatalyst Partners. It is speculated that this collaboration is intended to explore the strategic opportunities for potential sale of the company.

Investors seemed to be pleased as evident from the robust trading activity on Friday wherein, trading had to be halted for a while after shares had gained over 10%.

We note that despite having strong fundamentals, QLogic shares have not been doing that well for a while.

QLogic holds the leading position in the Ethernet market due to its strong product portfolio. In 2015, the company had double-digit lead in terms of market share over its peers. Its strong balance sheet is another big positive. The strong fundamentals have helped it to post positive earnings surprises in the trailing four quarters at an average of 30.81%.

But despite all these positives, in the past one year, the company's shares have lost over 6%, much more than a decline of about 2.6% in the S&P 500 benchmark.

Also, the company is seeing increasing challenges in driving growth owing to the ongoing transition from Ethernet to Fibre Channel networks on the one hand and the shift from on-premise infrastructure to cloud deployments on the other.

In 2015, QLogic's prime competitor- Emulex had also been acquired by Avago Technologies and at a seemingly discounted price.

In such a scenario, it does appear to be a good timing for QLogic to court potential buyers as its strong fundamentals and operating strength will allow it to protect its investors' interests.

While all this speculation could be futile as the company has not disclosed its intentions in partnering with Qatalyst, seeking a possible sale opportunity is one of the most probable options. This is because, in the past, Qatalyst had aided the sale of another company- Contexant Systems, which was then headed by current QLogic CFO Jean Hu. Hu is also the interim CEO of QLogic at present and apparently there is no search going on for a permanent CEO which strengthens our belief in the possibility of a sale.

QLogic currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the space are Extreme Networks Inc. EXTR, Allot Communications Ltd. ALLT and Ixia XXIA. All these stocks have a Zacks Rank #2 (Buy).

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