Cirrus Logic: Really, 5 Times Earnings?

Apr.17.13 | About: Cirrus Logic, (CRUS)

Cirrus Logic (NASDAQ:CRUS) preannounced its fiscal fourth quarter on Tuesday night, stating it was expecting 87% year over year revenue growth for a total of approximately $206.9 million for the quarter. In addition, the company stated it was taking a $23 million inventory writedown due to lower product valuations on decreased demand from its largest customer, Apple (NASDAQ:AAPL). Management stated the writedown was in response to "the customer" migrating from an older CRUS product to a new one for a new product. Of course, the reasonable thing to assume is that this is due to a new iPhone, probably due out in the second half of this year. On the fiscal first quarter front, CRUS forecasts $150 to $170 million in revenue and 50 to 52 percent gross margins.

The company is now trading at the ludicrous value of only 5 times its estimated earnings for 2014. I can't even believe I'm saying that as only businesses that are on the verge of death should be trading for such a valuation. In addition, the company is trading at only 2.1 times book value as of this writing and 1.9 times sales. These numbers are usually reserved for mammoth, blue chip no-growers that pay out dividends; CRUS grew revenues 87% year over year in the fiscal fourth quarter.

To determine exactly how insane the current valuation of CRUS is, we must provide some context. In the last four quarters, CRUS produced $713 million of revenue and $374 million of gross profit. This equates to a gross margin percentage of 52.4%. Since we already know that CRUS is saying it had roughly $206.9 million in revenue in its fourth quarter and is forecasting a midpoint of $160 million in its first quarter, we can extrapolate what this year will look like based upon last year's numbers. Keep in mind that CRUS just said it grew revenues 87% YoY when you consider that if we just take last year's second and third quarter revenue numbers and extrapolate them onto this year, we get a projected revenue number of $871 million. Remember, this assumes zero revenue growth for the rest of the year.

Now, if we apply the low end of the gross margin percentage range of 50%, we can estimate that CRUS will produce $436 million in gross profit this year. Now, we also know that CRUS turned 43% of its gross profit into net income last year so if we use this number again, we get a net income estimate of $188 million for this year. At CRUS' current valuation of $1.19 billion, that means that assuming an Armageddon scenario where the company is unable to grow revenues at all in the back half of this year, the stock is still trading at roughly six times earnings.

Of course, CRUS will grow revenues in the back half of this year and quite substantially so. Assuming that the consensus revenue number of $966.6 million is hit for FY 2014 and assuming the gross margin and net income percentages I laid out above, CRUS would be trading for 5.6 times earnings. That is not a typo; the market is valuing CRUS like it is going out of business.

Sterne Agee came to the rescue of CRUS this morning stating that the long-term fundamentals are intact for the company while lowering its price target from $36 to $27. Obviously, I agree the long term story is intact and let's keep in mind in considering the $27 price target that CRUS shares were trading at that level about two months ago; we are not talking about an overly ambitious price target here.

The point is that you shouldn't be scared away from the news that came out today because it was already priced into the price of CRUS shares. Given the fact that the shares have taken such a beating since the last earnings report, it would suggest to me that the market knew this revision was coming. However, investors are relentlessly punishing shareholders again today for something that has already been discounted. The preannouncement was nowhere near bad enough to warrant another 15% coming of the shares today and as such, I am adding to my long position. The company generates an enormous amount of cash and is not afraid to put it to work on share repurchases. I assume that after this drubbing, the company is buying today at these ridiculous levels.

Disclosure: I am long CRUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.