RF Micro Devices (Ticker: RFMD)

Bought a 2% position in RF Micro Devices, ticker RFMD, at $6.46.

Reason for Buying: Attractive segment with healthy secular tailwinds of increasing wireless usage, U.S. company with 85% of sales outside the country (benefits from weakening dollar), increasing market share in Asia, accelerating revenue growth, healthy ROIC of 13% last quarter (likely strengthens going forward), EPS recovering with growing trend of upside surprises, conservative FY12 (FYE March) EPS growth rate of just over 10%, P/E of under 10x on F12 EPS estimate.

RF Micro Devices designs and manufactures high-performance radio frequency (RF) components and compound semiconductors technologies. The company’s products enable worldwide mobility, provide enhanced connectivity and support advanced functionality in the cellular handset, wireless infrastructure, wireless local area network (WLAN or WiFi), cable television (CATV)/broadband and aerospace and defense markets.

Largest customer is Nokia, representing 44% in the June quarter. RFMD has been losing market share within Nokia, which has been widely talked about in the industry and market during 2010 and likely one of the main reasons the stock performed poorly until recently.

Large majority of revenue, as determined by "bill to" address, is outside the U.S., approximately 85% in F10. The company has been gaining market share in Asia as management has actively worked to diversify its customer base and replace Nokia's business. Revenue increased 29% last quarter, highlighting success in this strategy. China represented 37% of F10 revenue, followed by 14% in India. The majority of international sales are denominated in U.S. dollars, which become more price competitive when the dollar weakens.

Recent announcements of expansions to product lines. Completed restructuring in 2009 to improve operating efficiency. Repurchased 2012 convertible debt in July to reduce outstanding debt balance by $90 million, lowering interest expense and potential dilution should stock rise above $8, the initial conversion price.

Company has exceeded the EPS estimate for the last four quarters by $0.01 to $0.05. EPS estimate for F11 (FYE March) is $0.60 from Factset and $0.64 for FirstCall, and for F12 is $0.67 for Factset. P/E for F12 is therefore under 10x with potential upside to earning.