RF Micro Devices
How about RF Micro, then? Last month, Topeka Capital had similarly nice things to say about the increasing diversification of RF Micro’s customer base and its addition of new product lines.
GAAP-unprofitable, RF Micro isn’t in as bad shape as it looks. Last year, it produced positive cash profit in the amount of $38 million despite the accounting losses. Problem is, that still leaves RF stock trading at nearly 40 times annual free cash flow. So unless you think the stock is capable of long-term, annualized improvement in free cash flow production on the order of 40% or so, the stock’s probably overpriced.
Oppenheimer doesn’t think they can produce that kind of growth. Neither do I.
Cree
Shifting gears to a different kind of semiconductor, light-emitting-diode maker Cree also caught Oppenheimer’s attention Tuesday. The analyst wasn’t particularly enthused by the stock, however, and downgraded Cree on the theory that it looks “fully valued” in the near term.
Oppenheimer is right about that. After running up more than 50% over the past year, Cree shares now sport a sky-high P/E ratio of 95. They’re not quite as overvalued as they look, however, thanks to free cash continuing to flow into Cree’s coffers at a rate four times as fast as GAAP earnings accrue. With $226 million in trailing free cash flow, and a market cap surpassing $5.3 billion, Cree now costs a bit more than 23 times the amount of cash it generates in a year.
As with Skyworks, it’s the growth rate that keeps this from being a totally obscene valuation. Cree is expected to post annualized profit growth of 20.5% over the next five years. This suggests the stock is close to fairly valued, which is about as close as Skyworks is. It’s not a buy yet, but if a few more investors get shaken up by Oppy’s downgrade, and start taking profits — it could become one.
Foolish final thought
Bonus points today go to JPMorgan Chase, which delivered an extra dose of bad news to LED lighting enthusiasts, downgrading Veeco Instruments Inc. (NASDAQ:VECO), which makes equipment for making LEDs, to neutral. At first glance, it seems an unfair rating, given that at a market cap of only 18 times earnings — with cash making up nearly half its market cap — Veeco looks bargain-priced for the 15% long-term growth analysts expect it to produce.
Beware, though: Veeco has been reporting exceedingly weak free cash flow these past couple years, and mayn’t be as cheap as it looks. Management also warned of “overcapacity” and “weak end market demand” in its recent Q4 update, so Veeco probably isn’t out of the woods just yet.
The article This Just In: Upgrades and Downgrades originally appeared on Fool.com and is written by Rich Smith.
Fool contributor Rich Smith has no positions in the stocks mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he’s currently ranked No. 357 out of more than 180,000 members.The Motley Fool owns shares of TriQuint Semiconductor.
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