Monday, April 12, 1999

RF Micro Devices, Inc.
(Nasdaq: RFMD)
Website: www.rfmd.com
Phone: 336-664-1233
Price (4/9/99): $53 1/4


After spending the summer of 1998 in relative quiet, RF Micro Devices started showing up on Wall Street's radar after posting some quite impressive financial results. Riding the wave of increased cellular phone usage across the globe, RF opened some of its own fabrication facilities with startlingly successful results. The company makes some of the most highly demanded components used in cellular phones including amplifiers, attenuators, and a whole host of radio-related circuits.

A glance at the company's recent financial results will show why the stock has been one of the hottest to own over the past six months:

Quarter Ended:
               03/98   06/98   09/98   12/98
Sales         $12.6M  $23.4M  $31.4M  $41.5M
Net Income    ($3.6M)  $1.7M   $2.4M   $5.6M
Net Margin        NA    7.3%    7.6%   13.5%
EPS           ($0.12)  $0.05   $0.07   $0.16

Investors who tuned in to the stock were not only treated to a split at the beginning of April, but they have seen the value of their shares amplified by nearly a power of ten over the past year, an absolutely electric performance.


Founded in 1990 after being spun-off from Analog Devices (NYSE: ADI), North Carolina-based RF Micro Devices is one of the leading suppliers of radio frequency integrated circuits. The company's electronics are found in all sorts of radio equipment including cellular phones, pagers, cableless networks, and numerous other wireless products.

Finnish cellular phone maker Nokia (NYSE: NOK.A), another company recently featured in a Daily Double, is a major buyer of the company's products and was responsible for about 42% of the company's sales last year. In fact, 65% of RF's sales in the last quarter were made to buyers abroad. In addition, manufacturing conglomerate TRW (NYSE: TRW) owns a significant stake in the company's stock.


Income Statement
12-month sales: $109.0 million
12-month income: $6.0 million
12-month EPS: $0.16
Profit Margin: 5.8%
Market Cap: $2,092.7 million

Balance Sheet
Cash: $13.6 million
Current Assets: $59.1 million
Total Assets: $127.1 million
Current Liabilities: $25.0 million
Long-term Debt: $15.6 million
Total Liabilities: $40.6 million

Price-to-earnings: 332.8
Price-to-sales: 19.2


One of the more interesting characteristics to look for in any company is that of increasing sales. Time after time in this column we highlight companies that are doing little more than simply growing their business, and RF is no exception. The company's sales roughly doubled in each of the past three years, which is a clear indication of fundamental strength.

Another common theme with Daily Doubles that is consistent with the RF story is that of rising margins. While the company's gross margin has contracted a bit due to the volume of product shipped, overhead expenses have been held in check. With sales increases far eclipsing the increases in fixed costs, the company's net margins (and therefore profits) have exploded.

Furthermore, one could have looked at the relationship between RF and Nokia to find RF as an investment idea. Watching Nokia's results go through the roof, some investors may have made the connection that someone had to be supplying the components for all the phones Nokia was selling. A provider to the entire wireless equipment market, RF was the clear beneficiary of the strong demand for all wireless products, including cellular phones.


Unfortunately for individual investors, you can't exactly run down to the corner store and pick up the types of products RF sells. One practically needs an electrical engineering degree to truly understand the advantages and disadvantages of the company's products, making researching and grasping RF's position rather difficult. One of the Foolish mantras is that it is important to always to try to stay within one's circle of competency when investing in a company.

That said, it's hard to ignore the stunning financial growth the company has posted over the past few quarters, and RF is obviously doing something right to spark such strong demand for its products. Plus, it is a rather safe bet that the world's appetite for all types of wireless equipment will remain quite healthy for the foreseeable future.

At over 300x trailing earnings one with a value bent might easily dismiss the company as overvalued. But should the company make its quarterly earnings estimate of $0.17 per share in a few weeks, the trailing PE ratio will instantly drop to slightly more than 100x. Still quite expensive, but those high multiples can contract further in a heartbeat with the type of growth RF has shown in the recent past.

Nevertheless, much of the future growth has already been priced into the stock price today. While the story is interesting and the fundamentals strong, the asking price is still quite lofty. It's probably a prudent idea to wait for a pullback before tuning in further.

--Paul Larson

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