Investors Shaken by Motorola Might Be Calmed by Other Wireless Firms' Earnings

SAN FRANCISCO -- Any wireless enthusiasts spooked by Motorola's (MOT) subdued earnings news last week may find solace this week when two wireless-chip leaders report their first-quarter earnings: Texas Instruments (TXN), whose digital signal processors go into two of every three wireless phones sold, and RF Micro Devices (RFMD), which dominates the market for power amplifiers for cell phones. TI reports late Monday and RFMD reports late Tuesday.

Investors addicted to the high growth rates of companies firmly planted in the wireless communications industry were shaken Tuesday, when Motorola reported a 41% decline in operating profit for its cellular phone division and gave a cautious second-quarter outlook. Motorola executives said worldwide shortages of some components, namely flash memory needed to store data in wireless devices, meant it had to pay higher prices, and that cut into its profits. It also warned that consumers are gravitating toward lower-priced phones.

Still, most analysts and investors say that demand for wireless devices isn't slowing. Despite any short-term blips due to parts shortages, the leading wireless chip companies should all show healthy growth.

TI and RF Micro kick off a series of earnings announcements from companies that produce components for wireless devices. They include Anadigics (ANAD), Analog Devices (ADI) and National Semiconductor (NSM). In addition, Conexant (CNXT) reports Monday and Intel (INTC) reports Tuesday -- both companies are trying to expand into wireless communications.

No Wrong

Until recently, it seemed that companies heavily involved in wireless communications could do no wrong. Texas Instruments rose about 650% from October 1998 until it hit a high of 187 5/8 on March 3. RF Micro had risen 4,275% in the same period, hitting a high of 175 on March 3, the day after the euphoric market debut of wireless world wonder Palm (PALM ).

But the stocks have tumbled in recent weeks, along with those of the rest of the tech sector. Since early March, Palm has slid 67%, TI 20% and RF Micro 47%. So this week's earnings announcements could carry even more weight, especially if the market sells off again.

"Are we concerned? Absolutely," says Brian Roberts, a portfolio manager with Nelson Capital Management of Palo Alto, Calif., which holds Texas Instruments shares. "I think the wireless business is a big part of TI's business and for investors to justify the high stock price, they have to be hitting on all cylinders."

Charlie Glavin, an analyst at Credit Suisse First Boston, says investors have reason to worry over shortages of flash memory. Without flash memory, companies like Motorola and Nokia (NOK) can't produce cellular phones, and so they won't buy chips and power amplifiers for those phones from the likes of TI and RF Micro.

Still, long term, few are worried. In its Tuesday warning, Motorola said some 400 million wireless phones will sell this year worldwide. Even if Motorola sells less expensive phones, the digital signal processors and power amplifiers will likely be the same, and that means suppliers such as TI and RFMD won't see pricing pressure.

Tempered

Motorola's warning was also tempered by positive earnings news from Sawtek (SAWS), a maker of filters for cell phones. On Wednesday, the company reported earnings of 29 cents a share for its second quarter ended March 31, beating the Street's expectations by 6 cents. And it said sales should grow 10% in the current quarter.

Glavin reminds investors that, as with PCs, the post-holiday season is slow for cell-phone sales. (He rates RF Micro a strong buy and Texas Instruments a buy, because TI as a much bigger, established company has a slower growth rate in comparison to the smaller players like RF. Credit Suisse First Boston is an underwriter of RF Micro, but not of Texas Instruments.)

The Street is expecting TI to report earnings of 53 cents a share for its first quarter, according to the Thomson/First Call survey of analysts. That's up slightly from 33 cents a share in the same period last year, and up from the 51 cents a share it reported for the fourth quarter. The Street expects RF Micro to report 16 cents a share in profits for its fourth quarter ended March 31, up from 13 cents in same period last year, and up from 15 cents in fiscal 2000's third quarter.

In this market, any slippage could cause investors to bolt. But for those who are dead certain that cell-phone sales will continue to soar over the next few years -- folks like David Risgaard, portfolio manager of North Star Asset Management -- this current stock slide isn't any reason to sell. North Star holds shares of TI, RF Micro and National Semiconductor in its portfolio. "We don't see an end to this wireless evolution," Risgaard says. "It's not just cell phones, it's all things wireless. This thing can struggle for three to six months, and we will use it as an opportunity to buy more."