The Logical Value of Cirrus
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you have owned Cirrus Logic (NASDAQ: CRUS) for over one year, then I congratulate you: you made the trade that I could not. You have enjoyed gains of 200% over the past 12 months. Now, when I see this kind of steady gain for this long, it makes me uneasy. I wonder if this is going to be one of those bubbles that are always biggest right before the pop. Seeing this growth has me worried. How logical would it be to invest in Cirrus now?
What They Do
To know if it would be logical to invest in Cirrus, you would first need to know what they do. Cirrus Logic "develops analog and mixed-signal integrated circuits (ICs) for a range of audio and energy markets” -Reuters. In terms you and I understand, they make some of the guts for various electronic devices. Well, that doesn't sound too exciting does it? It is exciting; their biggest customer is Apple (NASDAQ: AAPL). Have I peaked your interest?
Yes, the world's biggest company is Cirrus Logic's biggest customer. That sounds good doesn't it? Cirrus has been around the stock market for a while, mostly just drifting along, until they started surging in 2009. The surge was fueled by a remarkable change in revenue, brought about by the iPhone, and later the iPad. Cirrus isn't the only company in the world who has benefited from Apple's heyday, Qualcomm (NASDAQ: QCOM) and Skyworks Solutions (NASDAQ: SWKS) are also Apple suppliers and have seen their profits go up in recent years. In 2011 Qualcomm saw net profits jump 40%. Skyworks enjoyed a 65% increase in their net profits. It pays to be a part of a popular product.
Providing supplies to Apple for their products is exciting, but I step back and think. Having that many eggs in one basket makes them vulnerable. It's very similar to the way IMAX (NYSE: IMAX) is at the mercy of Hollywood. If Hollywood doesn't make good movies, then IMAX’s profits take a hit. Making guts for IPad isn't the only thing Cirrus does, but it's a huge part. If Apple products were to take a turn for the worse, or decide to go with another company for their guts, what would Cirrus Logic do then?
Earnings and Valuation
Cirrus Logic right now has a $2.54 billion market cap. Since they trade just south of $40/share, this gives them a P/E ratio of 31. That's no bad. It's not great...but it's not bad either. Their overall sales surged over 60% in 2011, notably the same year as the release of the iPhone 4. Should Apple decide to release a new iPhone or a new iPad this year, we could see some similar growth. While a P/E over 30 makes me a little uncomfortable, if a company can back it up with growth, then it's logical.
A troubling aspect to consider is that net income has not grown in proportion to the gross income. If you are wondering where all that extra money is going to, a little is going to higher operating costs (like what happens in every growth company). But a good chunk of money is going to research and development. While one would like to see that bottom line grow, it's encouraging to know that the money isn't falling through the cracks. And it goes back to the previous question: what would Cirrus do if/when the Apple products are no longer their bread and butter? It appears they are working on the answer to that question by investing their gains in research.
Insiders are feeling very good about the future of this company. All CEO's talk the talk, but some don't walk the walk. Consider Facebook insiders selling like crazy the first chance they got. For the second quarter analysts were expecting revenue of $130 million, which still represents phenomenal growth. Cirrus' guys laughed that off as they set the record straight: they are expecting $170-$190 million. Perhaps they know something that we don't know? (If anyone does, it would be them)
I don't like that the stock is already up 200% this year. I don't like the 31 P/E ratio. I don't like the fact that they are pegged to Apple. I just don't feel good about any of that.
Feel. That's really not logical is it? If I take emotion out of the picture (like Mr. Spock or something) and look at the numbers, look at the growth, look at the valuation, look at insider sentiment...all those factors carry me to a place far away from my feelings. I don't feel like this stock is going to deliver, but logically I think it will. Cirrus is logically a value stock.
thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Cirrus Logic, Imax, and Qualcomm. Motley Fool newsletter services recommend Apple and Imax. 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.