Missing a Bit of the Apple

Written by GSCR Staff   
Friday, 13 December 2013 09:45

 

From time to time, conventional wisdom regarding a given stock is that it may be rightly out of favor on a qualitative basis. However, a stock can be still be attractive on a quantitative basis, thus making it a compelling buy. A great example of this phenomenon is Cirrus Logic, Inc. (NASDAQ -CRUS- $19.48).

CRUS designs and manufactures integrated circuits that employ high-performance analog circuits and advanced mixed-signal processing technologies. Its products enable system-level applications in mass storage, audio and precision data conversion. It delivers optimized products for consumer and professional audio, automotive entertainment, and targeted industrial applications, including energy control, energy measurement, light emitting diode (LED) lighting and energy exploration.

The market has been very worried, however, because CRUS’s biggest customer, Apple (NASDAQ - AAPL – $560.54), began to steer a small portion its business elsewhere.   Consequently, the stock price has been buffeted as the Street lowered its expectations about future revenues and earnings growth.  We perceive that these lower expectations have been largely reflected in CRUS stock price already.  EPS estimates for FY15 are now $1.80 as compared with $2.64 for FY14, confirming that this news is already factored into the present valuation.

Despite the Apple issue, CRUS appears to be expanding its customer base as well as nurturing its relationship with Apple.  While this effort to diversify its customer base could help CRUS’s long-term prospects, it may not make up for potential losses in revenues from Apple doing business with CRUS competitors over the intermediate term.  Still the Street’s diminished view is more likely to be offset by positive surprises until CRUS shows a concrete plan for developing customer relationships in both audio and energy. In any event, the metrics below indicate to us that the worst may be behind this burgeoning semi player.

Check out these figures and metrics:

        CRUS is undervalued compared with its industry, its peers, the S&P 500, and its own 5-year averages.  At current levels, the stock trades Moreover, the stock carries a Price-to-Book Value ratio of 2.1.

       The company has enjoyed tremendous growth since 2009. Its compounded annual growth rates for revenue, operating income, and operating cash flow were 54.2%, 99.2%, and 85.6%, respectively.

          CRUS has realized  a growing return on equity averaging close to 18% for the last ten years even without much leverage from any long-term liabilities.

        Management has achieved an efficient capital spending program that has kept pace with its good cash flow from operations for the last ten years.

         CRUS has an excellent balance sheet compared with its market capitalization of $1.2 billion. CRUS has $268 million in cash on hand, free cash flow of $271 million for the trailing twelve months, and no long-term debt.

        Management clearly believes that the stock is undervalued. CRUS announced a $200 million share repurchase program in November 2012.

 

Given the metrics above, we believe that the stock offers wide appreciation potential over the next 3- to 5-years.

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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