RF Micro Looks Cheap At Current Level

Citigroup is out with an Actionable Call on RF Micro Devices (NASDAQ:RFMD) saying the stock is down 8% YTD but clearly forming a bottom. Firm believes RFMD shares are significantly mis-priced and that upcoming catalysts appear poised to drive the shares higher in 4Q07 and 2008.

At 15.2x Citi's new 08E EPS ($0.41 vs Street $0.38), shares discount backward-looking negatives (1H07's Polaris II rev decline, MOT weakness, disappointing margin structure), rather than a late-07 inflection in MOT orders, 2008 SIMD deal accretion, and structural margin improvement potential. Risk/Reward appeal is evident in 38% upside to their $8.60 target versus downside risk to recent post-deal lows of $5.80.

Indications in Asia last week suggest MOT orders to component suppliers have hit an inflection late-quarter. Reflecting a turn the firm increases their C3Q07 revenue estimate $5M to $243M (Street $239M; CIR/Street EPS $0.06). In summary, a MOT rebound coupled with the on-target launch of Polaris III adds luster to the base biz revenue story, auguring well for solid C4Q07 revenue guidance.

RFMD's valuation is among the most inexpensive in Citi's coverage across EPS, book and sales parameters, an attractive base given looming estimate revision positives and a likely favorable shift in stock psychology. They expect the shares to trade steadily higher on October's results/outlook and then November's analyst day, and regard an expected tripling in operating margins (from 4% now to 12% by end-2008) as powerful propellant to shares appreciation in the next twelve months. Reits Buy.

Notablecalls: I issued an Actionable call alert on RFMD on Sept 5 after CIBC was out positive on the stock highlighting strength at Nokia. Now we have Citi out with a very strongly worded call, saying things are starting to look up at Motorola as well. Over the past weeks, there have been several upgrades on MOT (there's one today from RBC Cap), which seems to confirm Citi's views.

Yet, RFMD stock is trading around the same levels when CIBC's call was issued. It's cheap and has things going for it. It does not deserve to trade at $6 and change here. The stock deserves to be at $7 minimum. I suspect it's going to head there soon. Make sure you don't miss that train.

I'm going to re-issue the Actionable call alert here.