RF Micro Upgraded to Strong Buy on TriQuint Merger - Analyst Blog

On Jun 14, Zacks Investment Research upgraded RF Micro Devices Inc. RFMD to a Zacks Rank #1 (Strong Buy) from a Zacks Rank #2 (Buy), primarily driven by rising earnings estimates on bullish long-term growth prospects.

Why the Upgrade?

Redefining market dynamics, RF Micro Devices inked a definitive agreement to merge with leading semiconductor manufacturer TriQuint Semiconductor, Inc. TQNT in an all-stock transaction. The deal, valued at approximately $1.6 billion, is termed as a merger of equals and is expected to close in the second half of 2014. The combined entity is likely to create a behemoth in the semiconductor manufacturing industry, offering vital components to premier mobile companies like Apple Inc. AAPL, BlackBerry Limited BBRY and Samsung Electronics Co. Ltd.

With annual revenues of about $2 billion, the combined entity will bring under a common platform all the critical radio frequency RF components that are essential for fabricating mobile devices, thereby creating an undisputed market leader with a diversified product portfolio. These include power amplifiers (PAs), power management integrated circuits (PMICs), antenna control solutions, switch-based products and premium filters.

This in turn will likely offer better bargaining power and make it tougher for customers such as Apple and Samsung to push back on pricing. With global smartphone users predicted to triple to 5.6 billion by 2019, the merger provides a huge revenue-generating potential to the new entity.

At the same time, the merger strengthens the combined company's ability to better serve the infrastructure and defense/aerospace industries with advanced gallium nitride (GaN) solutions for additional markets and applications, and foundry services to support radar, next generation base stations, optical communications and the Internet of Things. The newly formed entity is also expected to be a leading player in this sphere with approximately $500 million in annual revenues.

In addition, the merger will offer synergistic benefits and increase the profitability of the new company through economies of scale and mutual sharing of manufacturing expertise, research and development costs and adjustment of staffing expenses. The transaction is expected to generate $75 million of cost savings in the first year of its operation, followed by another $75 million in the second year. Post merger, the deal is also expected to be accretive to non-GAAP earnings in the first full fiscal year of its operation.

Earnings estimate revisions for the current quarter and fiscal 2015 have moved up for RF Micro Devices on the back of strong long-term growth potential. With such positive strides, the share prices are continuously moving north and touched a 52-week high of $9.94 during its trading session on Jun 12. The year-to-date return of the stock currently stands at a stellar 104.1%. We expect the growth to continue in the near future as well.

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