RF Micro Devices: Q4 Disappoints but Long-Term Fundamentals Look Good

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Greensboro, North Carolina-based RF Micro Devices (RFMD), a manufacturer of high-performance radio frequency (RF) components and compound semiconductor technologies, announced its March 2011 quarterly report after the market close yesterday (see conference call transcript here). Both revenue and earnings at $213.3 million and 8 cents for the March 2011 quarter were in-line with analyst consensus estimates of $213.9 million and 8 cents respectively.

However, revenues and earnings were down significantly both sequentially versus December 2010 quarter’s $278.8 million and 19c and also year-over-year versus March 2010 quarter’s $260.8 million and 16c, due to seasonality and declining revenue at RFMD’s largest customer Nokia (NYSE:NOK) that accounted for approximately 55% of their sales in FY 2010. For the next June 2011 quarter, the company is projecting revenue flat to down 5% sequentially which would equate to $202 to $213 million versus analyst estimates of $227 million, and then sequential revenue growth starting in the September 2011 quarter.

RFMD makes the radio frequency components and compound semiconductor technologies that enable advanced functions in cells phones such as wireless and wired data transfer. The handset industry is their largest market and is a powerful driver for them going forward as both global cell phone shipments as well as the proportion of those shipments that are ‘Smartphone’s’ increases. Although the March and June 2011 quarter results are expected to be sub-par, the company expects sequential growth to return in the following September quarter. The company is actively diversifying their customer base and offsetting the losses at Nokia with increased business at HTC, Research in Motion Ltd (RIMM), Samsung, LG and Huawei.

Also, management is optimistic about the company’s prospects going forward and the CEO stated as part of the quarterly report press release that:

Looking forward, we expect RFMD will take full advantage of global secular growth trends and grow faster than our core markets. This will enable broad improvement in our financials, supporting margin expansion, operating leverage, earnings growth, continued strong free cash flow, and superior return on invested capital.

The stock currently trades at a forward P/E of 11-12 based on projected earnings of 55c for FY ending March 2012, while revenue is anticipated to fall slightly year-over-year. This is near the middle of its historical P/E trading range, and with the projected fall in both revenue and earnings for the current FY as well as the steep fall in revenue and earnings both sequentially and year-over-year for the current March 2011 quarter, it is expected that shares will trade weaker in the short- to intermediate-term.

However, long-term, the fundamentals of the company are still intact as global ‘Smartphone’ shipments will continue to increase, the company is diversifying its customer base to include more leading ‘Smartphone’ manufacturers, and most of the negatives from the Nokia losses are already baked into the stock price. As such, the shares can be expected to trade in a $5 to $7.50 range in the interim. A potential trading strategy would be to accumulate shares were the price to drop because of this quarter’s miss to near or below $5 and sell them if they rise to above $7.

Institutions have been net buyers of the stock recently, with 297 institutions holding a total of 202.5 million shares or 73% of the shares outstanding shares, up from 69% in the prior period. Of the 18 analysts covering the stock, ten recommend it as a buy, while seven rate it a hold, and the remaining one has a sell rating on the stock. Also, on average, analysts expect an upside to $8.63, 37% above yesterday’s closing price of $6.32.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Tagged: , Semiconductor - Integrated Circuits, Earnings
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