Apple (AAPL) is a fantastic consumer electronics company. It reshapes markets it enters, like personal music players (iPods), cell phones (iPhone), and laptops (Macbooks), as well as creating whole new markets (iPad) just by producing a product. These developments have greatly rewarded Apple's shareholders, propelling the stock into the mid $300's from around $200 a year ago. Add to that a mountain of cash, high margins, and a strong track record of innovation, and Apple seems like the perfect stock. However, with a market cap approaching $330 billion, and a cash pile that is not being used, the company has become too large to command the premium earnings multiple it deserves. Investors wanting to profit off of Apple's continued growth should look at Apple supplier Cirrus Logic (CRUS) as a way to circumvent Apple's stock's market cap ceiling.
Cirrus Logic is a semiconductor company that supplies the chips that help regulate and control the power and sound in consumer electronic s, as well as uses in smart meters for utility companies. Apple is the company's largest customer, and Cirrus has chips in every one of Apple's handheld products. Every iPhone, iPad, and iPod has Cirrus's chips inside it, making Cirrus very levered to Apple's continued success. The company reported third quarter numbers last month, and knocked the cover off the ball. Revenues were up 47% YoY to $95.6 million and gross margin came in at a remarkable 55%. Net income was $24.6 million, or $0.34 per share. The company should earn about $1.35 a share this year, compared to $0.59 in FY2010 and $0.05 in FY2009.
A company with that sort of profit growth should command a premium multiple, but with Cirrus shares currently fetching $23.80, it trades at a mere 17.5 times earnings, in line with the rest of the industry. A company with such stellar products, high growth rates and high leverage to Apple's growth should not trade at an industry average multiple. Given the growth trajectory and the Apple link, a multiple of 30 would not be outrageous. A market cap of $1.6 billion is in no way an adequate reflection of the business the company does, and the growth it is achieving. Where Apple's multiple has stagnated because of the high market cap of the company, Cirrus faces no such restriction, and the multiple will continue to expand.
The only stumbling block Cirrus faces would be Apple choosing a new supplier, and Cirrus losing its Apple contracts. Given Cirrus's patents, and the fact Apple chose to keep Cirrus as a supplier for the new CDMA iPhone launched for Verizon, and that does not seem like a substantial risk in the near term. That being said, Cirrus shares can be volatile on rumors of inclusion or non-inclusion in new Apple products, so there is some headline risk.
Shares in Cirrus Logic have run up a lot already, but Verizon iPhone sales should provide more fuel for the stocks climb. Add to that the fact that Cirrus shares can be used as a leveraged play on Apple, and the company should start to attract more attention from investors tired of Apple's low multiple and lackluster cash management. That said, investors should consider any pullbacks in the stock an opportunity. Cirrus Logic is the best way to play the Apple revolution now that Apple's stock has become a victim of the company's success. Rapid growth, high margins, and a low multiple make Cirrus Logic the way to profit from the Apple story.
Disclosure: I am long CRUS.
Additional disclosure: I own CRUS in the money calls
