A Cellular Stock Worth Buying

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit that some growth stories are bogus -- hence this regular series.

Next up: RF Micro Devices (NYSE: RFMD  ) . Is this maker of radio frequency components the real thing? Let's get to the numbers.

Foolish facts

Metric

RF Micro Devices

CAPS stars (out of 5)

****

Total ratings

700

Percent bulls

94.1%

Percent bears

5.9%

Bullish pitches

125 out of 132

Highest rated peers

Integrated Device Technology, DSP Group, Power Integrations

Data current as of Sept. 25.

When Fools talk about what will be the Next Big Thing, wireless is always part of the conversation. And when talking about wireless, it's important to remember two things: radios and chips. RF Micro Devices makes both, and that's just fine by Nokia (NYSE: NOK  ) , its largest customer.

The world's top-selling supplier of cellular handsets accounted for 44% of RF Micro's revenue in the first quarter of fiscal 2011, completed in July. Sales to Nokia had accounted for 59% of revenue in last year's fiscal Q1.

Over the summer, some Fools saw RF Micro's close ties to Nokia and subsequent move to diversify as a weakness. Others, such as my colleagues Rich Smith and Anders Bylund, saw the sell-off as an opportunity. Both rated the stock to outperform in CAPS. It hasn't disappointed, up more than 30% over the past three months.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

Not material

Not material

Not material

Revenue growth

21.1%

10.4%

(7.3%)

Gross margin

36.9%

36.3%

24.5%

Receivables growth

32.3%

19.9%

(22%)

Shares outstanding

271 million

269.1 million

264 million

Source: Capital IQ, a division of Standard & Poor's.

Longer-term, the data from this table suggests that diversification could lead to greater profits. Let's review:

  • Though normalized net income growth hasn't been material recently (due to losses in 2008 and 2009), accelerating revenue growth is a very positive indicator.
  • Gross margin is also ticking up, possibly as a result of brokering fresh deals with new partners that lack Nokia's extraordinary bargaining power.
  • I'm not thrilled with receivables outgrowing revenue, but I also think it's too early to be concerned. Diversification takes time, and RF Micro Devices may be extending credit in order put itself in a stronger position a year from now.

Competitor and peer checkup        

Competitor

Normalized Net Income Growth (3 yrs.)

Broadcom (Nasdaq: BRCM  )

32.1%

Cree (Nasdaq: CREE  )

83.3%

Kopin Corp. (Nasdaq: KOPN  )

Not material

RF Micro Devices

15.1%

Skyworks Solutions (Nasdaq: SWKS  )

54.9%

Source: Capital IQ. Data current as of Sept. 25.

This table is more troubling; it shows the impact of being subject to the whims of one massive customer. Yet it's important to remember that this data is historical. The RF Micro Devices of this table is materially different from the one you can invest in now.

Today's RF Micro is less dependent on Nokia, and ratcheting up its returns on capital. Most signs point to outperformance.

Grade: Sustainable
The wireless revolution is here, and by the numbers, it's clear that RF Micro Devices has a role in the uprising. But not all investors agree. The stock trades for a fraction of the long-term earnings growth Wall Street expects. I'm comfortable siding with the analysts on this one; I've rated RF Micro Devices to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like RF Micro Devices at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Nokia is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares of any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


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