Top picks 2012: RF semi 4-pack

by Paul McWilliams, editor Next Inning

Rather than select a single one as my “stock of the year” for 2012, I am selecting a favorite sector, along with four stocks.

In scanning the tech sector today, I believe one of the most durable growth themes is mobile connectivity.  Mobility means “no wires attached.”  This means devices like smartphones must use RF (radio frequency) semiconductors to connect. 

It doesn’t matter if the device is from Apple, powered by Google’s (GOOG) Android OS or even from beleaguered Research in Motion – if it connects to a network wirelessly it uses power RF semiconductors to facilitate the connection.  

This means, with an investment in RF semiconductors we don’t need to bet on a resurgence of Research in Motion or a continued dominance by Apple; we’re just betting the sales of mobile devices will continue to grow. To that end, the thesis has the simplicity even Warren Buffett would admire.

There are four pure-play power RF semiconductor companies traded on major U.S. stock exchanges; Anadigics (ANAD), RF Micro Devices (RFMD), SkyWorks (SWKS) and TriQuint (TQNT).  

Anadigics has a net cash value per share (includes long-term investments) of $1.42;  the Enterprise Value (EV) per share (price minus net cash) is $0.68 per share.

The forward earnings consensus from the covering analysts calls for a loss of $0.36. The forward P/E (Price to Earnings ratio) based on the EV price is 29.

Following the failures of its last two CEOs, ANAD is in a rebuilding phase.  In short, I think Wall Street is underestimating ANAD’s ability to recover in 2012 and, with that, overestimating its losses.  

While I think we’ll see ANAD burn through a bit more cash, if my overarching thesis proves valid, I think ANAD has the highest potential upside of the group.  

The not so subtle implication here is since ANAD is burning cash, the downside risk is also the most significant.  

RF Microdevies has a net cash value per share of $0.42;  the Enterprise Value (EV) per share  is $4.73 per share. The forward earnings consensus is $0.57 and the forward P/E is 8.3.

RFMD has very clearly out-executed the other companies on the list in 2011 and, I believe, is very well positioned to deliver both revenue growth and operating profit margin expansion in 2012.

SkyWorks has a net cash value per share of $1.10;  the Enterprise Value (EV) per share  is $13.27 per share. The forward earnings consensus is $1.89 and the forward P/E is 7.

SWKS’ Net Cash and EV Price have been adjusted to compensate for the estimated cash costs associated with its purchase of Advanced Analogic Technologies (AATI).

SWKS was the Wall Street darling prior to its decision to buy both SiGe and AATI last May.  While I agreed with the SiGe acquisition, rated Skyworks a sell following its announcement it had come to an agreement to buy AATI.  

While I’m still not in favor of the acquisition, given the fact SWKS is down more than 40% from when it announced the AATI acquisition, I think it merits consideration if your budget allows for a four-way split.  

However, if you are going to hold yourself to three or less stocks and you can tolerate the higher relative risks associated with ANAD, I would scratch SWKS first.

TriQuint has a net cash value per share of $0.86;  the Enterprise Value (EV) per share  is $3.67 per share. The forward earnings consensus is $0.35 and the forward P/E is 10.5.

RFMD has very clearly out-executed the other companies on the list in 2011 and, I believe, is very well positioned to deliver both revenue growth and operating profit margin expansion in 2012.

The short story for TQNT is its management didn’t do a very good job in managing its customer relations when its limited capacity didn’t allow it to fully support demand.  

Don’t get me wrong, it did very well at AAPL where it won two sockets in the new iPhone 4S, but with some other customers it didn’t do as well.  

TQNT is rebuilding these relationships, but will go through a period of compressed margins as it brings the utilization rate of its new plant up to an efficient level.  

That aside, I believe the markets are underestimating TQNT’s ability to deliver earnings in 2012.  Based on the fact three of TQNT’s directors have recently bought over 150,000 shares in the open market, it appears some insiders share my opinion.

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