Throwing Out The Baby With The Bathwater

by: Bret Jensen

Apple supplier Cirrus Logic (NASDAQ:CRUS) got crushed yesterday by announcing Q4 revenue would be just under $207M (up 87% Y/Y), down a bit from expectations of around $210M. More importantly, it projected Q1 revenue would be in the range of $150mm to $170mm, significantly below consensus of approximately $195mm. In addition, the audio codec chipmaker also says it will take a $23.3M write-down, $20.7M of which is due to "a decreased forecast for a high volume product" as a customer migrates to a new Cirrus component. Analysts generally agree the customer is Apple (NASDAQ:AAPL). CRUS lost over $3 a share to end the day at just over $18 a share. Obviously, this announcement contained enough news to justify a significant negative impact on the stock. However, the shares had already given up some 30% from their highs earlier this year. They are now priced at around 5x 2013's consensus earnings per share estimates prior to announcement. The FY2013 year ends for Cirrus on April 25th when it reports 4Q earnings.

The $18 a share CRUS is currently selling at is half the $36 a share median price target the seven analysts that cover the shares had on CRUS prior to this reduced guidance as well. Although I expect earnings estimates and price targets will be revised down on CRUS in the coming weeks, I think the huge decline is a bit of an overreaction. I initiated bull call spreads (Sept $18/$15 put pairs) for $1.25 net credit yesterday. It is a nice premium if the shares hold here or bounce back and I am happy to own the stock at a $16.75 a share costs basis with downside protection through September option expiration should CRUS continue to fall.

This announcement was also the latest bad news for Apple as it alluded to iPhone demand that is less than some expectations. AAPL lost over $20 a share Wednesday and broke through a support level of $420 a share on its fourth try over the last month. This was disappointing as I had hoped this level would hold at least through earnings. I bought a few more shares yesterday (no one likes to catch a falling knife) at just over $400 a share to average down. I continue to believe the shares are ridiculously cheap. If free cash flow continues to accumulate at the current rate, the stock market capitalization would consist of 50% or more of cash/short term marketable securities by the end of the year.

This is provided the stock does not move and/or Apple does not change its capital allocation strategy (increasing dividends/buybacks). However, I do believe Apple will increase its dividend payout substantially in the near future, probably during earnings next week. JP Morgan's Mark Moskowitz just came out with a note today stating he believes "We think that Apple could be on the drink of driving a major leveraging up." He goes on to say he projects "The company will take on $15B-$20B in debt and bump the dividend yield to 4%". That would certainly be welcome news to Apple's currently suffering shareholders. Verizon (NYSE:VZ) reported earlier today that it activated 4mm iPhones in the recently completely quarter.

I can understand the declines in Cirrus Logic and Apple recently based on disappointing news and worsening sentiment. The pullbacks yesterday from the suppliers that provide components to Apple, Samsung (OTC:SSNLF) and other players in the smartphone space seems a bit overdone as smartphone penetration and sales continue to gain at a solid rate. Suppliers that provide components to many manufacturers are isolated from the challenges of one, as one manufacturer's loss in another's gain. I therefore believe that this is a bit of a case of "Throwing the baby out with the bathwater". Here are a couple of cheap smartphone arms merchants I like here that should do well regardless of whether Samsung or Apple prospers with their smartphone and other mobile offerings..

RF Micro Devices (RFMD) provides radio frequency components and compound semiconductor technologies. Its products enable mobility, as well as provide connectivity and support functionality in the mobile devices, wireless infrastructure, wireless local area networks and cable television /broadband.

4 reasons RFMD is cheap at just over $5 a share:

  1. Consensus earnings estimates for both FY2013 and FY2014 have moved up over the past three months even as Apple's problems have compounded over that time frame.
  2. Analysts expect revenues to grow 20% in FY2014 (FY2014 started this month) and for EPS to more than double over FY2013 to 36 cents a share.
  3. The median price target by the 15 analysts that cover the stock have a $7 price target on RFMD. Oppenheimer upgraded the shares from "Perform" to "Outperform" in late March. Canaccord Genuity upgraded the shares to "Buy" cited its ability to make 4G LTE share gains earlier this month.
  4. The company has a solid balance sheet with net cash on the books and no net debt.

Qualcomm (NASDAQ:QCOM) is the "Intel" of the smartphone space which was covered nicely recently by fellow SA author Dave Dierking.

4 reasons QCOM is a bargain at $64 a share:

  1. The median price target held by the 37 analysts that cover the stock is $77 a share. Northland Capital initiated the shares as an "Outperform" earlier in the month.
  2. Consensus earnings estimates for both FY2013 and FY2014 have moved up nicely over the last three months. The company has easily beat earnings estimates each of the last two quarters. The company reports earnings again next week.
  3. The stock sports a five year projected PEG near 1 (1.01) and is selling at under 13x forward earnings even as it is expected to grow revenues at better than a 15% CAGR over the next two fiscal years.
  4. The company has a robust balance sheet with over $13B in net cash on the books and QCOM has a 2.1% dividend yield as well.

Disclosure: I am long AAPL, CRUS, QCOM, RFMD. 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.