Seeking Alpha
Profile| Send Message|
( followers)  

The stock of Cirrus Logic (NASDAQ:CRUS) has taken a beating of 11% in the past week's trading, and has fallen more than 30% from its October levels. The company supplies audio processing chips to Apple (NASDAQ:AAPL) for the iPhone, iPod Touch, and iPad. Concerns over Apple's cut in orders from its suppliers by as much as 50% -- due mainly to slower-than-expected demand -- has resulted in the lowering the share price of Cirrus Logic.

Cirrus Logic, incorporated in 1984, develops analog and mixed-signal integrated circuits (ICS) for a range of audio and energy markets. The company has expanded its product offering considerably in recent years, but still gets nearly 60% of its business from Apple. Investors have been anxious about the company's dependence on Apple, and have been dumping the stock ever since the news broke. But the stock has continued falling even after the news has been accounted for in the price. This has left the stock with juicy valuations, especially with quarterly earnings season just around the corner.

Valuation

Cirrus is expected to net 225% growth in earnings along with over 130% growth in revenue. The stock is expected to generate revenue of $286 million and earnings per share (EPS) of $1.7.

The company has an estimated forward P/E of 8, which proposes a value proposition for a high-growth stock. The current P/E of the stock stands at 17. With an expected year-ending EPS at $3.3 and assuming that the P/E stays the same, this takes the stock price to $56. That is exactly double the current trading price of $28, offering almost 100% returns. Even under a more nominal P/E of 12, the stock price comes out to $39, which is again 40% more than the current market price.

As can been seen, under different conditions the stock is expected to outperform and break above the $40 barrier. Since even the worries about its revenue for the March quarter being less have already been priced in, the stock should be able to fundamentally support such a jump.

Other highlights include the recently announced $200 million share repurchase program.

Cheaper iPhone

There are rumors going around that Apple will launch a cheaper iPhone targeted at China and other developing markets. Assuming the rumors are true, there is the possibility that Cirrus will be getting more business in the future from Apple. This is because a cheaper iPhone has the potential to outsell high-end iPhones, as the market for low-cost, affordable smartphones is tremendously huge.

Key Strength

Among all the other positives, it can be very easy to overlook perhaps the key strength of the company, which lies in its intellectual property -- indicated by the more than 1,100 issued and pending patents.

Other highlights:

  • Gross margins around 50% and steady operating margins around 25% show the consistent nature of the business, despite being in the challenging technology space.
  • Net cash position of $135 million provides excellent flexibility in operations.
  • Market cap of $1.85 billion and a price to sales (P/S) of 3.48 is yet another sign of investor confidence in the future growth potential.
  • Estimated five-year EPS growth rate is also much higher than the industry average (9%) at 32%.
  • Industry-leading return on equity (ROE) at 24% compared to industry average of 19%.

Conclusion

Seven out of nine analysts following the stock have recommended a Buy or Outperform rating. Cirrus is fundamentally a very strong stock with great potential and offers a cheap entry prior to earnings, providing excellent value.

Source: Will Cirrus Fall With Apple Or Rise From The Ashes?