Despite New Highs, Cirrus Logic Can Still Reach For The Clouds

| About: Cirrus Logic, (CRUS)

Shares of Cirrus Logic (NASDAQ:CRUS) shot up over 20% earlier this week after the company issued higher guidance. The earnings report also showcased higher inventory levels, leading people to assume the company, which supplies high-precision analog and digital signal processing components for the audio and energy markets, could have some huge Apple (NASDAQ:AAPL) launches coming up soon. Earlier in the week, Canaccord analysts also upgraded Cirrus shares to Buy after saying the company "sees LED controller and motor control chips reducing dependence on Apple." I have been an Apple shareholder before, but have never owned any of the component makers. I think Cirrus could be worth a look.

Audio products using Cirrus components include:

· Musical instruments, car amplifiers, home theater, media PCs, sound bars, media players, tablets, camcorders, smart phones, and ultrabooks

In the audio segment, new low power signal processing devices are said to be driving new opportunities. New opportunities also exist in handheld devices and tablets. Additionally, a new boosted audio amplifier is currently being tested with new customers.

In the energy segment, Cirrus makes products that include:

· Power meters & monitors, LED lights, motor control, seismic sensors, and weigh scales

Cirrus is beginning to see large growth opportunities in the energy segment. New A19 lamps will begin shipping later this year. Cirrus expects 5-10 million units to be shipped in fiscal 2013. The company's LED dimming technology appears to be ahead of the competition. The lighting segment could grow significantly for Cirrus as customers shift their lighting supplies to LED.

Cirrus' large focus is on its Tier One customers. The company is attempting to maintain key business relationships and realize high gross margins. Key customers include: Sony, Itron, Philips, Ford, LG, Bose, Harman, Samsung, Sirius, and Vizio, according to Cirrus.

Cirrus released a shareholder letter with earnings information, and also held a question and answer earnings call with analysts this week. Of course, the company does not discuss its main customers, but it is pretty well known that Apple makes up a large portion of Cirrus'\ revenue. However, the company is slowly diversifying itself away from Apple by getting new customers and strengthening the lighting and energy portion of its portfolio.

Revenue for the company's first quarter was $99 million, compared to $92 million last year. Gross profit margins were 54%. The audio segment saw sales of $80.7 million, up from $71.1 million a year ago. The energy segment decreased in the first quarter, from $21.1 million to $18.3 million. Net income of $6.9 million also decreased from last year ($9.2 million) due to higher research and development and operating costs. Earnings per share for the quarter were $0.11 GAAP and $0.22 non-GAAP, versus $0.14 and $0.24, respectively, from the year prior.

Cirrus continues to invest heavily in research and development, and has also spent money to make sure it can meet the production needs of some of its key customers. Inventory in the first quarter was up 73% from the previous year, and stands at $96.8 million. Cirrus is also bullish on product offerings going forward, and says that the quarter one inventory number will likely increase by 50% in the second quarter. All of these upgrades in guidance and inventory are framing up a great fiscal year for Cirrus. It appears Cirrus will supply the components for a new phone and potentially a new smaller iPad from Apple, and that it is anticipating a huge boost as a result.

First and foremost, Cirrus makes components for Apple products. The company does not name Apple in its earnings reports but does refer to its "#1 Customer." The "#1 Customer" accounted for 59% of the company's first quarter revenue. Its "#1 Customer" made up 63%, 70%, and 59% of revenues in the previous three quarters, respectively. Cirrus Logic has been diversifying away from its reliance on Apple, but this week's earnings report showed how strong the second and third quarter will be in relation to new Apple products. With that being said, I think Cirrus will make over 60% of its revenue from Apple. The following fiscal year, the number could dip below 50% with new launches in the energy segment.

With respect to next quarter, analysts are calling for earnings per share of $0.45 on $154.6 million in revenue. Cirrus has guided for revenue to be up 70% in the September quarter. Its target number is $180 million in revenue for the first quarter. The company's gross margin is expected to be 53% in the second quarter. Cirrus did not issue guidance for the third quarter, but did say that it expects "revenue to significantly exceed our target growth rate" for the December quarter. Fiscal 2013 has analysts predicting earnings per share of $1.90 on $614.6 million in revenue. The following year, analysts see Cirrus earning $2.48 on $780.68 million in revenue.

In 2011, Cirrus' revenue by quarter was $92 million, $102 million, $122 million, $111 million. So far in 2012, Cirrus has earned $99 million in the first quarter and is calling for $180 million the second quarter. With analysts expecting full year revenue of $614.6 million, that leaves $335.6 million to be earned in the remaining two quarters.

With Cirrus' overly bullish tone and their claim that the December quarter will exceed the September quarter, it seems unlikely that the company would earn less than $167 million in each of the remaining two quarters. In fact, Cirrus could exceed $200 million in revenue with a huge third quarter alone. The following quarter could see $150 million, with a 35% increase in revenue year over year. With those new numbers, Cirrus would see full year revenue of $629 million. I think these numbers are conservative, and the fourth quarter is really a guess right now.

As of this writing, Cirrus shares were trading at $35.95, just off of its 52 week high of $37.27. In the last year, shares have traded between $12.52 and $37.27. The huge jump in the stock set a new year high, but shares are still well off of their 1995 and 2000 highs of $57 and $43, respectively.

I think Cirrus will blow past analysts' target of $1.90 in earnings per share. Even if they hit the $1.90 number, shares trade at 19 times this year's earnings, which is not that high for a high growth company like Cirrus. The company will always have its naysayers, as it relies heavily on Apple for its earnings. However, Cirrus should have a home run year in 2012 with new Apple products, and it should see significant analyst upgrades in 2013 as it reports earnings and as it diversifies away from Apple.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CRUS over the next 72 hours.