RF Micro Devices Is a Major Opportunity

Offering earnings guidance above analyst expectations is obviously a bullish sign because, over time, earnings growth follows sales growth. And, when a company predicts greater sales or profits, we expect its stock price to soon follow.

Last week, wireless chipmaker RF Micro Devices (Nasdaq: RFMD  ) said that third quarter earnings would be double the consensus estimates, coming in as high as $0.06 per share on $245 million in revenues, compared to Wall Street's $0.03 per share earnings guess and $219 million revenue projection.

Now, don't go blindly buying on its bullish report -- you still need to do some research. Use the announcement as a jumping off point for additional research.

RF Micro Devices snapshot

 

 

Market Cap

$1.2 billion

Revenues (TTM)

$826 million

1-Year Stock Return

(43.1%)

Return on Investment

(7.3%)

Estimated 5-Year EPS Growth

11%

Dividend & Yield

N/A

Recent Price

$4.37

CAPS Rating

***

Source: Finviz.com. N/A = not applicable; RF Micro Devices doesn't pay a dividend

The Orient express
The mobile phone chipmaker reported second quarter earnings that were well ahead of expectations and, as noted above, its guidance for the third quarter was even better than that. It's a much better turn of events from where it started the year, worried about visibility into sales because of the Chinese lunar new year (it realizes more than a third of its revenues from China, and over two-thirds from Asia).

Now, RF did record lower sales in the second quarter from the year before, with revenues dropping 14%, as demand switched from lower-end 2G phones to higher-end 3G and 4G phones. Gross margins also contracted to 31.7% from 37.1%, as average selling prices plummeted, and it recorded an operating loss.

But it's RF's 3G products that will be powering its future growth, and China is in the midst of a major upgrade to the latest technology. China Unicom (NYSE: CHU  ) and China Telecom (NYSE: CHA  ) will be getting the iPhone 5, and Apple (Nasdaq: AAPL  ) is looking to sign on China Mobile (NYSE: CHL  ) by the second half of 2013. RF Micro has two RF switches in the iPhone 5.

The upgrade provides a lot of opportunity for chipmakers, which makes RF's resurgence all the more timely. It began volume shipments of its 3G and 4G products, comprising more than three quarters of segment revenues as Samsung grows in importance and Nokia (NYSE: NOK  ) fades into the background as customers. Samsung accounted for 22% of revenues in 2012, up from less than 10% in the two preceding years, while Nokia has fallen to just 14% of revenues from 55% in 2010. Now, with Apple as a customer, we can expect it to become a much more important client, as well.

Shooting out the lights
I've just rated RF Micro Devices to outperform the market indexes on Motley Fool CAPS, the 180,000 member-driven investor community where informed opinion is transformed into stock ratings of one to five stars. The mid-tier three-star rating RF carries suggests, perhaps, that members are warming up to the story, as well, because the proliferation of devices by its customers means that there's more to the story than just that.

Its chips are used in all sorts of high-speed mobile devices, including tablets and notebooks and, with the debut of Windows 8 from Microsoft (Nasdaq: MSFT  ) , there could be far more coming from Nokia here, which has found itself just about betting everything on the new OS.

Let me know in the comments box below if you think RF has hit the ground running and will power up even more growth ahead.

Raise your sights

The introduction of the iPhone 5 is an event Apple investors have been looking forward to for months. The stakes are high and the opportunity is huge, so to help investors understand this epic Apple event, we've just released an exclusive update dedicated to the iPhone 5 launch. By picking up a copy of our premium research report on Apple, you'll learn everything you need to know about the launch, and receive ongoing guidance as key news hits. Claim your copy today by clicking here now.

 

Rich Duprey owns shares of Apple. The Motley Fool owns shares of Apple, China Mobile, and Microsoft. Motley Fool newsletter services recommend Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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