Bull of the Day: RF Micro Devices (RFMD)

RF Micro Devices (RFMD) is what we call a 'deal stock' which means its one of two companies that are getting together. Usually 'deal stocks' have limited potential for investors from the time between the deal is announced and when the deal is consummated. Not so for RF Micro and TriQuint Semi (TQNT) which announced they were getting together back in February of this year. Today, RFMD is a Zacks Rank #1 (Strong Buy), and it is the Bull of the Day.

Deal Stocks And The Zacks Rank

Knowing that RFMD and TQNT are both deal stocks, it should be noted that it is pretty rare to see either one see a significant increase in earnings estimates. These changes to earnings estimates drive the Zacks Rank, with the lower the number the better the revisions to the consensus.

Most stocks that are involved in some sort of M&A often see the analyst community back off and look for the expected growth to come after the deal is closed. Often the company will even try to push contracts and new customers into future quarters as they will be rewarded for growth when the companies combine.

This is not the case for the RFMD / TQNT entity, as both stocks have been seeing a lot of growth in share price even after the deal was announced. On Friday, RFMD became a Zacks Rank #1 (Strong Buy) while TQNT has been a Zacks Rank #2 (Buy) since late April.

Most Recent Quarter

RFMD reported a strong 1Q14 following the announcement that it was combining with TQNT. On April 29, the company reported earnings of $0.10 per share, $0.03 better than the Zacks Consensus Estimate for a positive earnings surprise of 42%. The topline was also a beat, with revenues coming in $5M ahead of expectations.

As a result of the solid performance the stock moved higher by 4% in the session following the earnings announcement.

Prior To That Beat

Prior to the most recent beat, RFMD was already on a streak of 4 straight beats of the Zacks Consensus Estimate. The company met the number for the December 2012 quarter. The last time RFMD missed the Zacks Consensus Estimate was the March 2011 quarter, so it has been a while.

RFMD Sees Estimates Moving Higher

The Zacks Consensus Estimate for 2014 for RFMD has held constant over the last several months. This could be due to the fact that analysts are waiting for the deal to be consummated and to get some guidance from the company before rolling out new numbers. That said, they don't feel the same way about 2015.

The 2015 Zacks Consensus Estimate saw a big move higher following the earnings release in late April. The estimate moved from $0.50 to $0.68 and has remained at that level since April.

Valuation

The valuation of this stock is something investors should pay attention to, but also be aware that it soon will be part of a larger entity. The stock trades at a forward earnings multiple of 14.6x compared to a 14.8x industry average. The price to book multiple of 4.1x is well above the 1.7x industry average so value investors might want to look elsewhere. The price to sales multiple shows the stock trading at 2.4x compared to a 1.9x industry multiple.

The question becomes how low were those multiples at the time of the deal announcement with TQNT! As I look at the next fiscal year, I see expectations of 19% topline growth and a whopping 422% in expected earnings growth. The following year is showing 11% expected revenue growth and 116% earnings growth. Those are some huge numbers.

Post Deal Structure

TriQuint shareholders will receive 1.675 shares of the new company and RFMD shareholders will receive 1 share of the new company for each TriQuint or RFMD share held. At the closing of the transaction, the companies will execute a one-for-four reverse stock split resulting in approximately 145 million shares outstanding.

The Chart(s)

It is not too often that the 'Bull of the Day' gives two charts for the stock in focus, but again this is a deal stock. I thought showing how both have moved over the last six months would highlight the markets perception of this deal. The combined company will have a much better bargaining position as the supply chain for all sorts of mobile devices becomes a little more streamlined.

Follow Brian Bolan on twitter at @BBolan1

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy. Subscribers get daily emails along with buy, and sell alerts.
RF MICRO DEVICE (RFMD): Free Stock Analysis Report
TRIQUINT SEMICO (TQNT): Free Stock Analysis Report


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