Can This Stock Extend Its Rally Post Earnings?

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The third week of April will see a number of companies reporting results. Some will provide positive momentum to their stock price with solid numbers and/or a decent outlook, while some will be gunning for a turnaround in their fortunes. Chipmaker Cypress Semiconductor (NASDAQ: CY) falls in the latter category, as the company looks to do better in 2013 after crashing 36% last calendar year.

Cypress reports first-quarter results on Apr. 18. The company has been waiting on the success of Android tablets for quite some time now, but to no effect. Moreover, Cypress has been reeling under the effects of tepid economic conditions, and its products have not been finding good traction. However, the stock has seen a sort of mini rally since the middle of February, when Needham upgraded it to a Buy from Hold.

As such, the next earnings report will be crucial if Cypress is to justify the surge it has seen over the past two months. Let’s see what the Street expects from the company and if it can provide some hope to investors with a decent showing.

On revenue

Analysts, according to Yahoo! Finance, expect Cypress to post revenue of $167.3 million, almost 10% lower than the prior-year period. The top line has slumped massively in the last two earnings reports, down 23% and 26% in the third and fourth quarters of the previous fiscal year, respectively. Thus, a drop of just 10% would be a terrific improvement this time.

As Needham analysts cited (sign-in required) while upgrading the stock, the company’s most important product, the TrueTouch touchscreen controller, is finding some traction in the budget smartphone market in China. Moreover, they believe that the Cypress’ focus on the e-reader market is another positive. These checks by Needham suggest that the company is on course for a decent top-line showing as far as meeting analyst consensus is concerned.

However, with an expected year-over-year drop of 10%, Cypress will need to come up with some positive commentary about its revenue prospects. The company’s efforts in the Android tablet market haven’t been very profitable for it. While it had landed the touchscreen controller spot in Amazon.com’s (NASDAQ: AMZN) 8.9-inch Kindle Fire HD, it didn’t receive much of a lift from this account.

It’s clear that sales of the 8.9-inch Kindle Fire HD haven’t been as great as the 7-inch version, as evidenced by a couple of discounts that the tablet has seen in the past four months. Amazon’s pricing of the tablet, which went for around $300 before discount wasn’t too far from the iPad mini, and this has hurt sales.

As such, Cypress would be looking to the booming Chinese market for budget smartphones to arrest its slide. In addition, investors would hope that Cypress’ relationship with Samsung (NASDAQOTH: SSNLF), which is a 10%-plus customer, would provide further support to the company’s top line.

The Korean giant has improved its position in tablets as it doubled its share in the fourth quarter last year. Moreover, ABI Research expects Samsung to achieve a similar feat this year as well. This certainly bodes well for Cypress, as Samsung’s growing stature in the tablet market would be a significant tailwind.

On earnings

Analysts expect Cypress to be just about profitable with earnings per share of $0.01. This is way below earnings of $0.12 per share posted in the year ago period. The company hasn’t missed earnings estimates in the last four quarters, but there’s nothing to be positive about this trend as expectations have always been quite low.

Thus, with the consensus estimate sitting at such a lowly figure this time, Cypress might just trip over it. The company’s margins have taken solid hits, and it won’t be surprising if we see the trend continuing. However, Needham analysts believe that Cypress will grow its margins in the coming quarters as the company adjusts its expenses according to lower revenue.

The takeaway

Cypress has risen close to 14% ever since Needham upgraded the stock. If it can come out with a decent report this time, there’s no doubt that the rally could continue. Moreover, the stock’s dividend yield of 3.9% is another reason why investors could buy Cypress if the company signals a turnaround. Check back into this space again later this week for the complete analysis of Cypress, and find out which direction the stock might take going forward. 


Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Cypress Semiconductor . The Motley Fool owns shares of Amazon.com. 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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