Is RF Micro Devices' Stock Cheap or Expensive?

Updated
Is RF Micro Devices' Stock Cheap or Expensive?

Numbers can lie -- yet they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.

  • The consistency of past earnings and cash flow.

  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap RF Micro Devices (NAS: RFMD) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

RF Micro Devices has a P/E ratio of 18.1 and an EV/FCF ratio of 12.0 over the trailing 12 months. If we stretch and compare current valuations with the five-year averages for earnings and free cash flow, we see that RF Micro Devices has a negative P/E ratio and a five-year EV/FCF ratio of 18.0.

A positive one-year ratio of less than 10 for both metrics is ideal. For a five-year metric, less than 20 is ideal.

RF Micro Devices has a mixed performance in hitting the ideal targets, but let's see how it stacks up against some of its competitors and industry mates.

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

RF Micro Devices

18.1

12.0

NM

18.0

Broadcom (NAS: BRCM)

19.4

11.1

45.4

17.9

Skyworks Solutions (NAS: SWKS)

18.5

17.6

41.3

27.3

Cree (NAS: CREE)

22.5

154.9

39.3

37.6

Source: S&P Capital IQ; NM = not meaningful.

Numerically, we've seen how RF Micro Devices's valuation rates on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash-flow generation.

In the past five years, RF's net income margin has ranged from -99.8% to 10.6%. In that same time frame, unlevered free cash flow margin has ranged from -6.3% to 19.5%.

How do those figures compare with those of the company's peers? See for yourself:

Source: S&P Capital IQ; margin ranges are combined.

Source: S&P Capital IQ; margin ranges are combined.

In addition, over the past five years, RF Micro Devices has tallied up three years of positive earnings and four years of positive free cash flow.

Next, let's figure out ...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you willoverpay for stocks. But even though you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared with similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, RF has put up past EPS growth rates of 18.4%. Meanwhile, Wall Street's analysts expect future growth rates of 13.9%.

Here's how RF Micro Devices compares with its peers for trailing-five-year growth:

Source: S&P Capital IQ; EPS growth shown.

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: S&P Capital IQ; estimates for EPS growth.

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples that shares of RF Micro Devices are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at an 18.1 P/E ratio and we see that RF's five-year P/E ratio isn't meaningful because of losses, which are the result of a massive goodwill writedown in fiscal 2009. Its EV/FCF ratios (which ignore the non-cash goodwill writedowns) are much more attractive. Meanwhile, its growth has been good. But these initial numbers are just a start. If you find RF's numbers or story compelling, don't stop here. Continue your due-diligence process until you're confident one way or the other. As a start, check out RF Micro Devices' upcoming earnings release on Oct. 25. Analysts expect just $0.09 in EPS for the second quarter after $0.19 last year. You can also add it to My Watchlist to find all of our Foolish analysis.

You can also see the stocks I've researched beyond the initial numbers and bought in my public real-money portfolio.

At the time thisarticle was published Anand Chokkaveludoesn't own shares in any company mentioned.Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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