The Cavium Deal Makes Marvell Tech A Buy In This Analyst's View

Marvell Technology Group Ltd. MRVL announced this week it plans on acquiring rival chipmaker Cavium Inc CAVM for $40 per share in cash plus 2.1757 Marvell shares for each Cavium share.

The Analyst

Jefferies' Mark Lipacis upgraded Marvell's stock rating from Hold to Buy with a price target boosted from $18.50 to $27.

The Thesis

Marvell's proposed acquisition of Cavium should be viewed positively by investors, as it would combine two highly complementary product portfolios in the storage, networking and processing markets, Lipacis said in the upgrade note. (See Lipacis' track record here.) 

Little overlap exists between the respective customer bases, which will likely result in revenue synergies and higher sales force productivity, the analyst said. 

The pro forma entity should generate a 2018 earnings per share of $1.49, which implies a 19 percent accretion to Marvell's earnings, the analyst said. The semiconductor company would also see $173 million from cost-cutting synergies, 10 percent revenue growth, a 65 percent gross margin and 35 percent operating margin in the full year, according to Jefferies.

Perhaps most important, Marvell's management team earned a "reputation for execution" — something that's expected to carry over to the new company.

Lipacis' $27 price target is based on a 17x multiple on a 2019 pro forma base case EPS of $1.61.

Price Action

Shares of Marvell hit a new 52-week high of $22.23 Tuesday morning and were trading higher by more than 2 percent, while shares of Cavium also hit a new 52-week high of $85.27 and were higher by around 1.2 percent.

Related Links:

Buy Marvell? The Rumored Deal With Cavium Has Real Potential

8 Semiconductor Stocks That Could Be Acquisition Targets