Cirrus Logic: Strong Propensity For Price Appreciation

| About: Cirrus Logic, (CRUS)
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The technology industry is practically the driving force of the economy as the progress in the industry continues to evolve the lifestyles of consumers and businesses. The industry has produced some of the largest companies that exist today and the very nature of the industry suggests that it is not just one wave. The industry is driven by a combination of innovation and execution which are essentially the two components necessary to drive growth. This standardized formula is unique in application for every company which makes this industry a very interesting arena for analysts and investors. Mostly, the stakeholders are inclined towards the front line companies; however, the supplier companies can also prove to be extremely profitable for investors under the currents of the technology industry.

Cirrus Logic (NASDAQ:CRUS) is one of these small companies with a market capitalization of $1.1 billion and TTM revenues of $714 million. The company develops analog and integrated circuits for a variety of customers which belong to audio and energy markets. The key factor which makes the company unique is its business strategy. Unlike most other competitors, the company primarily focuses on providing products and services to tier-one market leading companies. By developing such relationships, the company intends to ensure a long term prospect with each customer. For this strategy to be effective, a strong degree of diversification is required which has not been achieved by the company as yet. As reported by Bloomberg, more than 70% of the company's revenues come from Apple Inc. (NASDAQ:AAPL). This level of exposure to one company has already proved detrimental to the stock price of the company.

Source: Bloomberg

The above chart shows the change in stock prices of Cirrus Logic and Apple over a period of three years. The chart clearly reflects the degree of integration between these two stocks over this period. This high sensitivity relationship between the companies works in both directions. Considering the stock price movements in the past, Cirrus Logic has realized the adverse effects of this formation and is now looking to capture more customers in order to limit this company specific risk. Other customers of the company include Motorola (NYSE:MSI), Ford Motors (NYSE:F), LG and Sony (NYSE:SNE).

Outlook for Audio Products Segment

The market for smart phones has experienced a recent boom as more than 50% of the phones shipped this year were smart phones. At the same time, the audio and voice experience of portable devices, which include smart phones and tablets, is becoming increasingly vital to the overall performance of the products. Some recent developments in these segments such as adaptive noise cancelling to improve voice quality and speaker amplifiers to provide loud sounds with smaller speakers without adversely affecting the quality are key drivers for the industry's future growth.

Source: Barclays Investor Presentation (May 23, 2013)

The above chart shows the forecasted growth rates of the global smart phone market. The industry is expected to mature over the following three years. The opportunity for companies like Cirrus Logic will persist as the demand for these devices remains robust and the number of shipments continues its upswing due to the fast growing nature of the audio products market.

Outlook for LED Lighting

Contrary to the audio products segments, the LED lighting is a substantially emerging market with accelerating outlook for the future. The LED market represented 1% of the global lightning units. According to estimates, this figure will increase up to 19% by the end of FY16.

Source: Barclays Investor Presentation (May 23, 2013)

The above chart shows the expected progress of the LED lighting market in the coming three years. According to these expected figures, the market will experience a substantial growth and Cirrus Logic is well positioned to benefit from this growth prospect.

Comparative Analysis

The comparative analysis of the company's financials with its competitors and the industry will provide insight into the potential of the company from a going forward perspective.

Data Source: Morningstar

The above table shows some key performance and valuation metrics of the company, its competitors and the overall industry. The valuation metrics of these companies and the industry suggest that the company is substantially undervalued against its peers. The P/E ratio is specifically pointing towards strong undervaluation. At the same time, forward looking estimates suggest further undervaluation as the PEG ratio of the company stands at 0.4 according to Morningstar estimates. Also, the performance indicators show that the company's financial standing and growth is strong and it will continue to make strong profits over the coming years compared to its competitors.


The latest wave of mobile technology has been very profitable for investors of the technology industry but this market appears to be maturing and large appreciations in those stock prices do not appear to be a possible prospect. At the same time, the small stocks like Cirrus Logic which continue to operate in growing and emerging markets propose a stronger propensity for price appreciation. The figures suggest that Cirrus is in a very decent position to benefit from the industry future growth segments. Therefore, I propose a buy recommendation as the recent decrease in price allows for a good buying opportunity for long term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.