Apple (AAPL) has had a rough go of it in the past several months, the sordid details of which you can read in any of the dozens of Apple articles published on the matter here on Seeking Alpha. I won't rehash why Apple is a buy or a sell or why it has fallen from $705 to $460 per share. However, I believe a strong case can be made for Apple to take advantage of its enormous, and ever-growing, cash pile and a beaten-down supplier in order to not only buy a wonderfully profitable and growing asset, but save some serious money in the process.
Cirrus Logic (CRUS) is a fabless semiconductor company based in Austin, Texas that supplies signal processing integrated circuits for audio and energy markets. The company's bread and butter is its audio components, which Apple uses in its mobile devices. In fact, Apple constitutes roughly 91% of Cirrus' revenue. This means that CRUS has ridden the wave of Apple's explosive growth in the mobile computing space and is now a $1.7 billion company in its own right with shares trading for roughly $26 today.
So why would Apple want to buy Cirrus Logic? The answer is simple; Apple could buy CRUS with, say $2.2 billion from its $130+ billion cash pile, offering a roughly 30% premium to today's price for CRUS and not only would Apple gain some control over its supply chain, it would save hundreds of millions of dollars per year it is currently paying Cirrus to make components for its mobile devices. How is this possible?
We know that, over the past four quarters, CRUS has generated $713 million in sales and $188 million in operating income. Doing a bit of math shows that CRUS' operating margin is a cool 26.4%. Since we know that Apple is 91% of CRUS' revenue, we can assume that it is also 91% of CRUS' operating income, or about $171 million in the past four quarters. Given that CRUS shares are currently on offer for about 10 times trailing operating income and the company has a forward PE of only 6.8, it seems as though shares are quite cheap. This would be a great time for Apple to make an all-cash offer to takeover CRUS and integrate CRUS into its own supply chain while simultaneously saving itself billions of dollars in future payments to CRUS.
The math here is simple; Apple can buy Cirrus for $2.2 billion or whatever number management would like and given current expectations for CRUS, Apple could end up with CRUS certainly paying for itself in less than 10 years and probably more like 5 to 7. At such time, CRUS could either be sold again for a multi-billion dollar profit or continue to pay enormous dividends internally through lower costs for audio components and a more streamlined and controlled supply chain.
I am fully aware that Apple doesn't like to actually manufacture its products; however, the opportunity to save hundreds of millions of dollars per year by purchasing one supplier is a juicy one. And given that $2.2 billion is roughly two weeks of net income for Apple, the company wouldn't even blink at a price tag that high. Indeed, if Apple decided to actually invest its cash pile instead of just looking at it, buying up several small suppliers such as what I'm proposing would pay dividends for years in terms of less money lining the pockets of suppliers' shareholders. Apple is paying something like $170 million per year to CRUS that it could be keeping if it would only invest some of its cash. In other terms, Apple could look at a $2.2 billion buyout of Cirrus as an investment that pays $170 million in dividends per year; wouldn't we all like that?