Just as your pulse is checked during a routine physical, free cash flow is used as an indicator of a company's health. It equals the cash brought in from operations minus the money needed to pay the bills. Think about leftover money in your checking account after you pay this month's bills.

Investors and analysts see this leftover money as a gauge of a company's ability to perform. It is available for transactions such as handing out dividends and working on new products.

Some argue free cash flow is wrongly overshadowed by the emphasis often placed on earnings. Earnings numbers can be manipulated and don't always tell the whole story -- and earnings don't mean much if there's nothing left over after a company pays its expenses. Even if you bring in a six-figure salary, but no money left after paying the bills, are you in great financial shape?

You don't have to be Einstein to figure out free cash flow. To calculate the number, subtract the company's expenditures and dividends from its operating cash flow.

If the free cash flow is written in red ink, it doesn't necessarily signal curtains. This is common for young companies looking to grow. It also could be a result of heavy investments, which in the long run could be worth a standing ovation.

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Monday, August 11, 2008

Chip Maker RF Micro Should See Fortunes Rise As It Heads Into Strong Period

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Kathryn Glass

FOXBusiness

It may not be a blue-chip stock, but semiconductor maker RF Micro Devices (RFMD) has strong earnings potential, said Sam Dedio, portfolio manager of the Julius Baer U.S. Smallcap Fund.

Dedio’s company, Artio Global Investors (formerly known as Julius Baer Investment Management), holds RF Micro in all four of its U.S. equity funds.

The stock is cheap after coming off a difficult quarter during its seasonally slow period in January and dealing with excess inventory in China, said Dedio.

RF Micro manufactures mobile-communications components. Its radio-frequency chips are found in everything from cell phones to GPS devices, enabling connectivity in wireless devices. Dedio’s fund has held the Greensboro, N.C.-based tech company for several months now.

At the beginning of the company’s fiscal year, RF Micro announced major restructuring plans that included cost-cutting and the discontinuation of its investments in cellular transceivers and GPS products, which should bode well for the stock, Dedio said.

In addition, the company’s business historically has been heavily tied to Motorola (MOT), which hurt RF Micro as Motorola lost market share. Now, however, Motorola makes up less than 10% of RF Micro’s business, which Dedio said should help improve the company over the long haul. Because of the seasonal nature of the business, Dedio said it’s important to consider the company a long-term investment.

RF Micro's quarterly results "are volatile and they’re seasonal,” he said. “They definitely do better in the second and third quarters…and the stock actually performs better then too.”

Now that RF Micro is heading into its seasonally strong period and is introducing new models into the marketplace, Dedio is hopeful there will be good sales of the new products.

“The overall fundamentals are really improving,” he said. “If you take out the seasonality and look at it from a go-forward annual perspective they’re really in a position to improve results.”

Dedio also thinks the company is in a position to gain market share against smaller competitor Anadigics (ANAD). Anadigics recently lowered its outlook below analysts’ expectations. Dedio thinks both RF Micro and competitor Skyworks Solutions (SWKS) will benefit from industry consolidation.

Dedio sees the potential for a lot of green in the company’s future. He said the free cash flow metrics will improve with RF Micro potentially able to have 35 to 45 cents in annual earnings power over the next two years. He said the stock could reach $4.50, more than 21% higher than its current price.

“I guess what it comes down to is that they’re restructuring their business and they’re taking cost out; we like that,” he said.