This Beaten-Down Stock is Gunning for a Turnaround, but Can it Execute?

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Note: This post included inaccurate information about the company's book-to-bill ratio. It has been corrected.

After being beaten down mercilessly in 2012 where it depreciated almost 36%, mixed-signal and programmable solutions company Cypress Semiconductor (NASDAQ: CY) is finally offering hope to investors for a better year ahead. But is a rebound really on its way or will it turn out to be another disappointing year for Cypress? Let’s check.

Mixed emotions

The company managed to beat consensus estimates quite comfortably in its recently reported fourth quarter, but its year-over-year readings are downright bad. Revenue dropped almost 26% from last year; gross margin went down almost 5 percentage points and net income crashed 86%.

Cypress’ management states that tepid economic conditions dragged them down. But management is of the opinion that the company’s top line will hit bottom in the current quarter and start picking up after that.

Some positives

Cypress is realigning its businesses after spinning off Cypress Envirosystems and completing the acquisition of Ramtron. Its book-to-bill ratio stood at 0.88 at the end of the quarter, which is the best in the past one year. Moreover, the structural changes within the company are aimed at lowering operating expenses and improving efficiency. Also, its CFO purchased $100,000 worth of shares recently and this news sent the stock up around 2.5%.

All of this sounds pretty good, and positive. Also, with the stock trading within 17% of its 52-week low along with a juicy dividend yield of 4.5%, many would look at it as a major opportunity. Moreover, with Samsung being a 10%-plus customer, potential investors might think that Cypress will make them money. However, it would probably be a long and treacherous road to recovery.

Competition to contend with

Cypress’ programmable systems division (PSD) segment, which includes its Consumer and Computation Division (CCD) and the core PSoC business, accounts for almost half of total revenue and could be under a lot of pressure. It makes products such as CapSense, TrueTouch etc., which are touchscreen controllers used in mobile and infotainment devices.

Cypress had landed a design win (sign-in required) for’s (NASDAQ: AMZN) 8.9-inch Kindle Fire HD, while competitor Atmel (NASDAQ: ATML) won the spot inside the 7-inch version. Unsurprisingly, Amazon’s 7-inch version appears to be more successful than its bigger brother. Reports suggest that the 7-inch Kindle Fire is still witnessing great demand this year, while the 8.9-incher, which was priced pretty close to the iPad mini, went into discount mode to sell itself.

Thus, Atmel seems to be the prime beneficiary from Amazon’s tablet while Cypress was unable to capitalize. Moreover, Atmel seems to be a better play on touchscreen controllers than Cypress since it counts Samsung, Microsoft, and Amazon among others as customers and could get better in the long run.

The competition in this segment is very stiff and there will probably be a price war, as Cypress CEO T. J. Rodgers said on the conference call. Cypress states that they have the required technology to compete and have some cutting-edge products, but how they will fare remains to be seen. An improving book-to-bill ratio denotes that they are moving in the correct direction, but it would be prudent to wait and check if Cypress can turn all this positivity into revenue.

Major turnaround needed

Cypress is also trying to salvage its static random access memory (SRAM) business, which has been in free-fall mode (link opens PDF) over the past few years, and the Ramtron acquisition was made to aid this endeavor and upgrade older technology. Also, Cypress is focusing on making nonvolatile memories through its subsidiary AgigA Tech. They recently penned a deal with Micron Technology and intend to make low-cost and high-quality nonvolatile memory products.

If Cypress manages to improve its nvSRAM business, then it can open up a range of opportunities in enterprise or medical equipment among others.

The bottom line

There’s a lot to like about Cypress given its efforts to bounce back, low price and solid dividend. Potential investors who are considering initiating a long position at the current levels should keep in mind that the turnaround is all talk now, and one should wait to see if Cypress is able to walk the talk. It’s facing a good deal of competition in its lucrative touchscreen controller business while SRAM recovery is a work in progress.

Thus, it would be better to keep an eye on Cypress from the sidelines, and you can do so through the Fool’s free Watchlist feature by clicking here.

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends and Cypress Semiconductor. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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