Cirrus Logic is on Sale!

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

Cirrus Logic (NASDAQ: CRUS) is a chip company that supplies audio integrated circuits to Apple (NASDAQ: AAPL) for their popular iPhone and iPad lines, including the latest iPad mini.

Cirrus Logic announced earnings that beat their revenue and earnings estimate, but apparently their guidance disappointed for Q3 and thus the stock took a real drubbing. Cirrus is well off its 52-week high mark of over $45 a share, selling as of Friday Nov. 2 for just above $32 a share. According to Yahoo! Finance numbers, it is now selling now for a trailing P/E of just over 20

Let me go through some of the company's recent earnings results:

Gross margins were down slightly from 53.5% to 51.7%, as their costs of components went up. Operating expenses grew as R&D spending increased. Earnings and Revenues were both strongly up with net income on a GAAP basis coming to $35.4 million, or $0.51 per diluted share, compared to $11.2 million, or $0.17, in the same quarter a year ago. Apple audio chip component revenue increased 112.6% year over year to $177.9 million. Given that Apple accounts for 62% of Cirrus' business, you can see how their fortunes or misfortunes are intimately tied.

These results aren't too bad for a little Austin, TX, company with a market cap of just over $2 billion. It's balance sheet is swell as well, with cash and short-term investments coming in at $134.6 million versus $166.7 million in the previous quarter. The company has no long-term debt, something that always makes me glad. Just to be clear, the adjusted earnings beat consensus estimates by $0.10 a share and revenue more than doubled to $193.8 million, better than the $180.8 million consensus revenue estimates.

Strengths:

Cirrus Logic is riding the Apple pony as long as it can, with the new iPhone 5 and the old 4S and 4 containing Cirrus silicon. The growth of these phones and the new iPad will fuel revenue and earnings growth for at least the next 2-3 quarters. Valuation is certainly reasonable for a company growing at a clip over 20% per year for the last 5 years, with higher growth on a quarterly year over year basis depending on product seasonality from Apple (its energy business appears to be sinking some, but they remain close to the Eagle Ford shale and that part of the economy is booming and may be revived later).

Weaknesses:

As Apple goes, so does Cirrus. It is a small company compared to the other suppliers and Apple may cut it out of future products and/or design its own audio integrated circuits. With a small market cap the upside is large, but so is the downside. Supply constraints also have a lot to do with the short-sighted punishment from Mr. Market, and I would rather invest in a company that can't make enough product to meet demand than one that has falling demand.

Threats:

Other suppliers can take up its business. Texas Instruments (Nasdaq: TXN) comes to mind, as they produce some of the same type of audio analog circuits. If Apple decides to replace Cirrus Logic in it next product cycle then expect the P/E ratio to contract to the 8-9 range in punishment. Texas Instruments boasts a market cap of about $38 billion and sells for a lower P/E ratio of about 19. Continued supply constraints could make Apple and other buyers switch to the competition.

Opportunities:

Expansion of its product line and design innovation remain at the core of what Cirrus Logic has to do to survive and thrive. I see that in their R&D expenses. Given the current price and consensus estimates of $4 a share in earnings for FY 2013, the downside is limited and the opportunities for continued expansion are there as they could go into the Android phone and tablet world.

In summary, Cirrus Logic is on sale this week, and that may not last long. I am considering buying more shares at these prices, and as always do your own research boys and girls to see if my numbers jive with yours. In the meantime, just wait until the Christmas season is over to see if the iPad mini will be a hit with all those Cirrus Logic chips embedded inside.

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xerohype owns shares of AAPL and CRUS. 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.

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