This Stock Desperately Needs a Turnaround

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

The first half of the year is firmly behind us and there have been a few companies that haven’t done well. As such, the upcoming earnings season will be quite crucial for them as they would look to provide some impetus to their business and the stock price. Chipmaker Cypress Semiconductor (NASDAQ: CY) is one of such companies.

With the stock having gained a meager 4% this year and the previous earnings report being a disaster, Cypress’ second-quarter report on July 18 will play a pivotal role in determining whether or not it can keep its head above the water for the rest of the year. The stock had lost 36% last year, and if the next earnings report doesn’t pull of a rescue act, then Cypress investors might be in for another disaster this year.

Let’s take a look at what the Street expects, and also check the health of the company’s business to get an idea as to how the outlook might look like.

On revenue

Analysts, according to Yahoo! Finance, are looking at revenue of $182.8 million, which would be almost 10% down from last year’s second-quarter if achieved. The original revenue estimate was $183 million when Cypress had reported results three months back, and it hasn’t moved down much even though the company itself had called for a lower mid-point guidance than the Street estimate.

Cypress had said that it expected revenue of $178 million to $186 million, the mid-point of which is $182 million and is slightly lower than the consensus estimate. However, the company might just be able to beat (or at least meet) that estimate, since management had sounded a bit optimistic last time on the conference call regarding the business.

Cypress had exited the quarter with a book-to-bill ratio of 1.04, which means that it is witnessing order inflow and was “fairly booked” for the quarter, in the words of Brad Buss, CFO. Moreover, management had indicated that it is being conservative and it expects new customer ramps to be tailwinds for the business.

Thus, even though the top line estimate might not have been adjusted much to reflect Cypress’ own guidance, the company might be able to at least meet it given the bookings it had last quarter.

On earnings

This is where Cypress has been faltering massively. Analysts are expecting the company to earn $0.07 per share, which is quite some way off the $0.18 per share that it had earned last year. However, the estimate has been adjusted downward from the original expectation of $0.09 a share and sits right in the middle of Cypress’ own guidance of $0.06 to $0.08 per share.

Thus, I don’t expect it to miss this estimate now as it has been lowered over time. But then, if you’re expecting the earnings to improve from here onwards, you might be in for a surprise. Gross margin had declined 5 percentage points in the first quarter on a year-over-year basis to 50.7%, and the company doesn’t expect to get back to its prior run rate soon.

So, even though Cypress looks positioned to satisfy the bottom line estimate, it shouldn’t be forgotten that earnings have been declining at a rapid pace.

On outlook

It’s pretty much evident that Cypress has been facing tough times and as such, investors would be looking for some positive commentary and a decent guidance. There have been enough no shows in the past as the optimism that was built up by analysts (sign-in required) has failed to materialize in the real world.

The company is expecting a seasonal push to its top line as sales of its important products, TrueTouch and CapSense, are expected to gain momentum as its important customer prepares a new tablet. Cypress had supplied the touchscreen controller for Amazon’s (NASDAQ: AMZN) Kindle Fire HD last time and it is probably this customer that Cypress is counting upon to provide some thrust to its programmable system division (PSD) business.

Rumors suggest that Amazon would be releasing the next iteration of its popular tablet in September this year and Cypress will probably benefit from the ramp up in production of the device. However, it remains to be seen how the Kindle Fire performs this time as the competition in the segment has heated up with both the Google (NASDAQ: GOOG) Nexus and the Apple iPad mini set for an update.

Google is rumored to be unveiling the Nexus pretty soon, and if such rumors turn out to be true, Google might well be fitting the Nexus with a 1080p display. Analysts expect the pricing to be in the range of $200-$220, and if Google can manage such a price tag, it would be difficult for the Kindle to find many takers, and Cypress will be again in a spot of bother.

So while these products might witness a spike in the near-term, it remains to be seen how they will perform in the long run. The fact that Cypress also counts Samsung as a customer for its touch solutions is another advantage, but as I said, the competition will be tougher this time and it would make sense to watch how the story unfolds from a distance.

Apart from the above, Cypress had witnessed certain improvements in industrial and automotive businesses in the first quarter and the company is looking at steady long-term growth in this business. In addition, Cypress expects its memory products business to be up and that’s another positive.

The bottom line

So, as far as outlook is concerned, I have my doubts about the company’s primary segment, PSD, while the others are showing some signs of life. Many investors would be lured by Cypress’ lucrative 4% dividend, but the company needs to deliver earnings growth and arrest revenue decline if it has to sustain that dividend.

Will Cypress finally offer some concrete piece of evidence that its business is finally going to recover? Check back this space again after the company’s results for more analysis or better still, add it to your watchlist by clicking here to stay up to speed on the latest developments at Cypress.

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