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Finding Value in LTXC

|Includes: Xcerra Corporation (XCRA)

The question an investor must always ask is this:  What is that company worth per share?

A commonly used measure is to look at earnings and apply a P/E ratio.
LTX Credence recorded $0.99 of earnings in the past 12 months, and has current analyst estimates at $0.80 of earnings for the next 12 months. (14,13,20,33)

If one takes a conservative 10x multiple, we can find $8 of value right away.

But wait!  The forward earnings are lower than the past year, isn't that a bad sign? 
How can I, as an investor determine the outlook for the company?

Reasonably, we can't.  
However, in this case, we have help. 

Verigy - VRGY, recently proposed to acquire LTXC.
A competitor in the same space thinks that this company has good prospects. 
VRGY and LTXC agreed to a merger with LTXC valued at 0.96 shares of Verigy.
At the time, Verigy was in the area of $9.

Thus, a competitor's management team, who should have the best insight to the market and the future of the market, determined a value above $8.50.

Of course, mergers are all about synergy.  The acquirer's management would only perform the merger is they figured that the sum was greater than the parts. 

Here we have 2 methods of valuation, both leading to estimates north of $8, yet the shares trade at around $7.20.

What's your next move??


Disclosure: I am Long LTXC.

Additional disclosure: Previously long VRGY, now out.