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I usually avoid companies whose revenues are closely tied to a small number of customers. Losing one of these customers would be disastrous for such a company, and I imagine management would bend over backwards to maintain these relationships. Margins would surely suffer from pricing pressures and increased sales expenses.
However, if a company is going to ride the coat-tails of a single customer to great profits, best to make that customer Apple (NASDAQ: AAPL). Not only are their phones, tablets, and computers among the most coveted consumer technology products, the relatively short cycles between new generations of products means steady sales for their suppliers.
Cirrus Logic (NASDAQ: CRUS) is an example of such a supplier. This audio converter and digital signal processing product maker now generates 60% of its sales from Apple, up from just 16% of sales in 2009. A shareholder who has owned the company since the beginning of 2010 has seen their investment increase more than tenfold, and there is still a lot of room to run.
To convince oneself of this, one needs to look no further than the most recent first quarter earnings report. Management has guided a year over year 70% increase in sales for the second quarter, and the CEO’s latest letter to shareholders further guides that revenues for the third quarter will be “significantly higher” than the second. It’s obviously difficult to put a hard number on “significant” increases, but even assuming that third quarter revenues exactly match second quarter revenues it will still be a 50% increase over last year’s third quarter.
Beyond this obvious bullish indicator, inventory levels back up management’s claims. Inventory increased over 100% from levels at this time last year. The last time Cirrus increased inventory by this much, Apple was months away from releasing the iPhone 4S and the new iPad.
There’s little doubt that Cirrus has maintained its relationship with Apple for the next generation of iPhone and iPad, and keeping these relationships strong should continue to propel the company’s growth opportunities into the future. There is no shortage of guesses as to what Apple’s next innovation will be, but I can safely assume there will be an audio component to it, and Cirrus’s investor presentation mentions the company is currently working on multiple new custom projects with Apple.
Cirrus is no one-trick pony. Energy products once accounted for over 25% of total sales in 2010, but only accounted for 18% of sales in 2012. However, the company is making some smart moves in energy, specifically in LED lighting. Cirrus has designed a series of LED controllers that have made great advances in dimmable LED lights. They have set a lofty goal of developing a controller that works across the over 200 types of dimmable LED lights and have developed a relationship with Philips Electronics (NYSE: PHG), the largest light bulb manufacturer. The market is still relatively young and still developing, but LED lights could prove another huge revenue source for Cirrus in the future.
There is a risk of Cirrus losing its biggest customer, and the share price would tumble if that should happen. However, the company appears to have strong relationships with Apple, and there are no indications the situation will turn sour in the near term. I’m very happy to see Cirrus is not content with simply riding the Apple gravy train and is making big moves in the Energy segment. The stock is pretty reasonably priced (30x ttm earnings) for such a growth story, and the company sports a very healthy balance sheet with no debt and $167 million in cash while generating over $80 million in operating cash flow the last two fiscal years. Of all the Apple “pure-plays,” I think Cirrus is a strong contender for outperforming all the rest.
drfrank1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Cirrus Logic. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.