China Techfaith Wireless (CNTF) has been an incredible trading stock in recent months, rallying from the 12's to 18 twice in the last 4 months. Last night, CNTF reported solid earnings of .24 vs. analyst estimates of .22. However, as part of their earnings release, CNTF warned that Q1 2006 would be well below expectations because of a transition from GSM platforms to 3G phones. Despite the short-term down guidance, their guidance for the year 2006 is above analyst estimates, with strong expectations after the transition to 3G.
After selling off from 18 to the 12 area in the last few weeks, CNTF is trading down in the 10's this morning after the earnings report. We view this selloff on the Q1 warning as a buying opportunity for the long term. If CNTF meets their higher full-year guidance and the strategic shift to 3G is successful, CNTF should remain a great long-term buy. Q1 is almost over, so operational performance should improve dramatically for the rest of the year. 3G in China should improve their performance further.
The market is forward looking, so once the Q1 setback is in the past, the stock should perform better. As long as the Q1 miss is only a short-term transitional phase on the way to a solid year, as management expects, we view the weakness on the Q1 miss as a buying opportunity for the long term. While CNTF may remain weak in the short term as traders exit, a PE ratio of around 10 for a stock with high growth potential if they meet their performance objectives looks like an attractive risk/reward situation to us.
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