Buy GigOptix (GIG) On Weakness - Sterne Agee

Sterne Agee CRT analyst, Douglas Freedman, thinks GigOptix (NYSE: GIG) $55M acquisition of video broadcasting and compression IC provider Magnum is a strategic move longer term as it provides GIG with access to IoT and consumer end markets. It also enhances the growth rate of the combined company leading to a positive estimate revision. No change to Buy rating, PT goes to $4.35.

Despite expectation for immediate earnings accretion of 21% to 2016 EPS, GIG stock was down 5.2% post the Magnum deal announcement and after the close, largely due to the $15M new debt issue and management's lack of elaboration on synergy expectation. The analyst views the sell-off as creating a good entry point at current valuation, given the improved growth outlook and margin profile the combined business.

The deal is expected to be accretive immediately, with 2016 pro-forma (including 9 months operation from Magnum) rev/GM/EPS guided to $61M/70%/$0.23 (at the midpoint), above previous consensus estimates of $47M/65.9%/$0.19. The structure of the deal is cash + equity, with the cash portion consisting of cash available on hand and a new term loan of $15M.

Sterne Agee is increasing 2016 rev/EPS estimates from $48M/$0.20 to $61M/$0.22, as well as raising the PT by $0.10 to $4.35, or 15x 2017 EPS est of $0.29.

For an analyst ratings summary and ratings history on GigOptix click here. For more ratings news on GigOptix click here.

Shares of GigOptix closed at $2.58 yesterday.

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