Is RF Micro Devices, Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does RF Micro Devices, (NASDAQ: RFMD  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell RF Micro Devices's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at RF Micro Devices's key statistics:

RFMD Total Return Price Chart

RFMD Total Return Price data. Source: YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

6.7%

Fail

Improving profit margin

(102%)

Fail

Free cash flow growth > Net income growth

(86.4%) vs. (102%)

Pass

Improving EPS

(101%)

Fail

Stock growth (+ 15%) < EPS growth

10.3% vs. (101%)

Fail

Source: YCharts. * Period begins at end of Q4 2010.

RFMD Return on Equity (TTM) Chart

RFMD Return on Equity (TTM) data. Source: YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(102%)

Fail

Declining debt to equity

(59.7%)

Pass

Source: YCharts. * Period begins at end of Q4 2010.

How we got here and where we're going
We first looked at RF Micro Devices last year, and the radio-frequency chip specialist's performance has deteriorated to the point where it's lost two of its previous passes to finish with only two out of seven possible passing grades -- and one of this year's passes was only awarded on a technicality, as the slump in RF Micro's net income has exceeded the decay in free cash flow during our three-year tracking period. Will RF Micro be able to reverse its fundamental slide and rebound, or will investors' patience be rewarded with further underperformance? Let's dig a little deeper to find out.

Just this week, RF Micro topped Wall Street's estimates on earnings per share in its fiscal fourth quarter, which is the second time in a row that the company's done so this year. While demand for RF chips has been on the rise, RF Micro's also implemented cost-cutting initiatives to improve its margins. RF Micro has also announced a planned merger with fellow RF chip maker TriQuint Semiconductor (NASDAQ: TQNT  ) to form a new entity with combined revenue of over $2 billion.

The proposed merger is likely to give RF Micro and TriQuint new pricing power and end-to-end supply opportunities with current supply partners Apple (NASDAQ: AAPL  ) and Samsung. The all-stock transaction is expected to close during the second half of 2014, and should result in cost synergies of at least $150 million within the next couple of years. Fellow Fool Rich Smith notes that RF Micro and TriQuint shareholders will receive 1 and 1.673 shares in the newly formed firm for each share owned in their respective entities, which will collectively give RF Micro's and TriQuint's shareholders 50% stake in the post-merger company. The newly formed company could also benefit from the shared industry experience of two top executives -- TriQuint CEO Ralph Quinsey and RF Micro CEO Bob Bruggeworth.

Going forward, demand for TriQuint's base-station products is expected to increase with the launch of LTE networks in China. RF Micro has also been implementing several strategic cost-control plans, including the improved sourcing of raw material, the reduction of fixed costs, the addition of production capacity, and driving greater sales of high-margin CMOS power amplifiers. Fool Harsh Chauhan points out that RF Micro anticipates double-digit revenue growth for the 2014 fiscal year, driven by design wins in both Apple and Samsung devices coupled with sustainable growth in the Chinese smartphone market. However, shareholders will probably be more interested in the new growth numbers that will result from the combination of RF Micro and TriQuint.

Putting the pieces together
Today, RF Micro Devices has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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