Why does RFMD trade at current low PE compares to its peers and many other stocks?
Is it a temporarily situation or is it something that will continue?
Will RFMD do better or worse in near and far future?
Will the sector do better or worse?
What is the trend for economy? Is it improving or is it getting worse?
If we can answer most of above questions then we may do better investments.
I try to answer most of them but anyone else is welcomed to contribute.
1- RFMD trades at low prices
A) Some bad news is priced in. Investors are pricing in the worst situation. It started with a rumor about NOK business and RFMD has not answered the concern firmly so far. One thing is not for sure that nor could RFMD or NOK predict how they do business in future. Both are looking at their benefits. NOK wants to be diversified. It gets better deal when it deals with more than one supplier. On the other hand, RFMD is more geared to mass production and low prices than peers are. Therefore, RFMD stays a top supplier of NOK as RFMD management has indicated in the past. However, NOK may want to try 5% to 10% of its business with different suppliers. It is already doing such but it may want to try new products from different suppliers.
One thing that investors are ignoring is that other cell phone makers may want to do the same and switch to RFMD in expense of other suppliers.
This concern will fade away in future. Although RFMD may lose a small percentage of its NOK business, it may gain more business from other cell phone makers.
B) Some posters pointed to RFMD debt, cash and numbers of outstanding and diluted shares. I totally refuse this idea. RFMD traded around $5 in 7/09, around $5.50 in 9/09 and again around $5 in 12/09. In all previous periods, cash-debt was worse, the number of shares was higher and income prediction was lower. Therefore, this is not the case.
C) All the signs and prediction for RFMD sector point to 12% - 18% improvement. RFMD will do better one-way or another. Economy also is improving slowly. Therefore, it is not 2008 repeat anymore.
D) RFMD revenue will not be worse than FY 2010. At worst case, RFMD will get the same revenue as FY 2010 for next 2 years. At normal situation, RFMD may have 5% to 15% revenue growth per year for next 2 years. This will reflect in better cash-debt, lower number of shares and eventually higher income.
My conclusion is that RFMD is in a temporarily situation. It is part technical, part uncertainty regarding the future. It should be the management job to clear the clouds instead of putting everything in mysterious way. Last time RFMD pre-announced income, it should indicated clearly that its income would be between $.13 to $.14, flat to lower revenue and OP margin of 17% and higher. With clear numbers, there is no excuse for investors to punish the stock.
In worst situation, it will take about 12 weeks for RFMD to see at least $5 again. That means after RFMD finishes its FY 2010. FY 2011 and FY 2012 numbers will be displayed. Even PE of 10 for FY2011put RFMD PPS around $5. If RFMD does not see $5 in next 12 weeks then there may be something wrong with the company, which I doubt it.
The reason for above statement is that I have seen other companies in the same situation. Fairchild Semiconductor (FCS) was trading around $8 a month ago. That was almost PE of 8, the same as RFMD. FCS debt-cash is almost the same as RFMD. After 2009 numbers and predictions were replaced with 2010 and 2011, FCS started to move up. It is trading above $10 and above PE of 10 right now. Same thing will happen to RFMD in next 12 weeks.
Good post! So what you are saying is if RFMD has another blow-out quarter then share price should pass it's old high set in 2009.
The only negatives still lurking are debt and greed. The debt will go away over time but the greed will still be there unless management realizes how much they have hurt this stock with their constant free share dumping at any price. Maybe it's time for a change at the top.
doc, et. al.,
I think it was in the 10Q about the Board changing Bruggeworth's incentive and pay plan so he would look out a few years and make recommendations for how Rfmd should target opportunities and set course for the company strategy.
This is a good sign, for a lot of reasons, and perhaps explains the low-hanging fruit system of the past of poor company performance still rewarding executives because their options became priced at the past year's lower share price. After all, why drive share price higher if by sandbagging it, the next year's pay plan is easy coin. And perhaps, so went Jerry Neal selling his shares at unheard of low prices in 2008, and he still made money.
(This is not documented proof, but the suspicion is there.)
B. The window of positive perception was narrow based on what was happening during the surge from March, 2009 and based on whether Rfmd would get its operation restructured. That perception gave way to the same-old perception of Rfmd: still not diversified, still not gaining share where it counts in smartphones, still too dependent on the cellular business, and still too much debt compared to their peers. That narrow positive perception also gave way to other areas Rfmd was having problems: no MPG, nada.
Fairchild is not RFmd, not Swks, not Tqnt, not Anad, so the comparison for valuation doesn't apply. I hope you are right about 12 weeks, but I think 12 weeks is slotting Rfmd as though they were some other company with some other history in some other segment. This entire segment will be re-characterized this year for valuation based upon secular growth trends. It hasn't happened yet, but it will. And Fairch won't have anything to do with it.
Not see the forest for the trees.
RFMD had over $122 m FCF in 3 quarters instead of planned $120 m for the whole year. RFMD income and revenue for FY 2010 have reached the second highest after year 2007. RFMD did much better than expectation for FY 2010 so far. If investors priced it at high $5 about 5 months ago when the estimates were lower, diluted shares were higher by at least 25 m and debt was higher then they should rethink current prices. Yes, the market was in favor of most stocks. However, RFMD continued its progress while the PPS dripped. Two quarters ago, it was dream to report $.14 income for one quarter. RFMD did it and I think it will repeat it with higher numbers.
I mentioned FCS trend that has been a trend for many other stocks. It is not one to one comparison to RFMD but to see other stocks that disappointed its investors. Investors were not willing to give FCS a fair PE until new 2010 numbers replaced its 2009 numbers. Some other stocks have experienced the same scenario. May be RFMD investors want to see the same thing, which will happen in late March.
Bottom line, it is income and how much progress RFMD can make in future. I think RFMD is on right track. There are enough businesses for RFMD and a few other stocks in the sector and all may do well. Big brothers are watching them and the best two top companies may be acquired by a larger companies or private investors as long as the price is right.
I agree with about everything that you said. Mgmt. continues to deliver and the debt load continues to be retired. People/investors often want instant gratification, if it was that easy, everyone would making money. Patience wins with RFMD.