Citigroup convertible analyst curbs enthusiasm for Triquint on downside concern, limited upside

By Ronda Fears

Nashville, Feb. 13 - Acknowledging a nice run in the Triquint Semiconductor Inc. convertible, Citigroup Global Markets Inc. is stepping away from the issue on concerns that upside is limited and downside considerable, given the company's acquisitive bend and the lack of a high cash reserve.

On the back of a roughly 300% gain in the underlying stock over the past year, the Triquint 4% convertible due 2007 has added more than 20 points to a level of 98 with the stock at $8.80. The 52-week range for the stock is $2.70 to $9.93

"We have decided to remove TQNT 4.0%-07 from our recommended portfolio," said Citigroup convertible analyst Lynn Hambright in a bulletin Friday.

"We are giving up what we believe to be the last couple of points after a nice run from the high 70s."

However, she also noted, "For our purposes we are choosing to step aside. We assume some clients wanting a cash alternative may be able to more effectively play to this name's strengths and weaknesses."

At a price of 98, with the stock at $8.80, the analyst put the implied credit spread at 248 basis points over Treasuries with a yield to maturity of 4.71%.

"On one hand, we suggest the implied credit spread of T+248 is in a fair range given the strong credit," Hambright said, noting an assets-to-total-liabilities ratio of 2.38x and a cash-to-total-liabilities ratio of 1.2x, plus positive cash flow and profitability in the most recent quarter.

"However, on the other - in the absence of a high cash balance - we admit our enthusiasm is curbed. We would expect to see a wider credit spread given a fairly low revenue base, low profitability and a highly acquisitive strategy."

After speaking with Triquint management about those concerns, the analyst said she was reminded that the company is highly acquisitive, that they cannot guarantee the cash balance would stay where it is and that there are no plans to refinance the convertible.

"In summary, while we think the company's as-is credit is solid, we had hoped for a more convert-friendly attitude from management," Hambright said.

"Given the bond's extremely low delta, high cash balance and management emphasis on acquisitions - we suspect a disproportionate amount of downside risk over the short/medium term that we cannot offset. Additionally, we see our upside as limited."

The bond, with roughly $269 million outstanding, is callable now at 102, but on March 1 the call price drops to 101.5 and by 0.5 increments each year thereafter.

Clearly, a premium call price would be nice, or at least par, she said.

Par translates into an implied credit spread of 175 basis points over Treasuries - "something we can't justify without a high cash balance, net income profitability and positive cash flow generation, and the comfort that these things won't be going away. Something we can't rely on," Hambright said

The analyst added that, given the conversion price of $67.8, "it stands that we are most likely unable to benefit from equity-friendly activities."

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