Why Cirrus Logic Isn’t a Buy Going Into Earnings

Apple (NASDAQ: AAPL  ) supplier Cirrus Logic (NASDAQ: CRUS  ) is set to release its third-quarter results on Jan. 28, and it looks like there is some optimism building around the stock. Short interest is probably declining as Apple's deal with China Mobile (NYSE: CHL  ) is expected to give Cirrus a shot in the arm. Also, Cirrus' diversification into newer areas gives bulls more reasons to cheer, who expect this dirt cheap stock with a trailing P/E ratio of less than 10 to become an out-performer in 2014.

However, would you like to put your money into a company whose earnings are expected to decline at a CAGR of 31.60% over the next five years? Cirrus might see a spike if it manages to post decent results and offer a better outlook, but it is far from being a long-term buy at the moment.

Dialog: Not the right benchmark
In his pre-earnings analysis, Fool contributor Hugo St. John, III, argued that a drop in Cirrus' short interest could be the result of a robust performance from Dialog Semiconductor.  Dialog derives around 70% of its revenue from Apple, which makes it similar to Cirrus, which generates more than 80% of its revenue from the smartphone behemoth.

Dialog recently updated its expectations for the fourth quarter. The company expects revenue to increase 31% year-over-year on the back of strong sales in mobile systems during December. Now, this looks like a positive sign for Cirrus going into earnings, but analysts expect otherwise. Cirrus' revenue is expected to decline 31% year-over-year in the quarter that ended in December, while earnings per share are expected to drop to $0.77 from $1.64 per share in the year-ago period.  

More trouble ahead?
Cirrus has been a risky play due to its over-reliance on Apple for revenue. Recently, it was revealed that it had lost the audio amplifier slot in the iPad Air to Maxim Integrated Products. Since then, it has been all downhill for Cirrus, making it look more like a value trap than a value play. In addition, surging sales at Dialog should be taken with a grain of salt, as it is a Cirrus competitor.

Dialog supplies power management chips to Apple for the iPhone, but it also makes audio codecs.  Now, Cirrus is also known for supplying audio codecs to Apple, which is why soaring sales at its competitor should not be taken as an encouraging sign. Barclays' analyst Blayne Curtis doesn't rule out the possibility of Apple taking away all amplifier spots from Cirrus, and this would mean an annual revenue loss of $150 million -- or around 20% of the top line. 

China Mobile might not be a big tailwind
In addition, Apple's deal with China Mobile might not have a very big impact on Cirrus' results. According to analysts, iPhone sales were already expected to come in at 54 million units in the previous quarter, but since Cirrus has probably failed to increase its content at Apple, it isn't in a position to enjoy solid growth from this account. Also, the fact that Apple might be negotiating lower prices for Cirrus' solutions could be another headwind.

Despite analysts at ZDNet expecting the China Mobile deal to add 15 million-20 million units to Apple's sales, Cirrus investors shouldn't get too euphoric. Moreover, Cirrus' diversification initiatives, such as energy products and LED drivers, haven't taken off yet. The commoditized nature of the LED business means that Cirrus could end up facing troubles similar to its audio amplifier business.

The bottom line
All being said, investors should still stay away from Cirrus, despite its cheap valuation and optimism going into the earnings, as it could turn out to be a dead money investment.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 23, 2014, at 11:40 AM, rericksen wrote:

    I hope your getting enough money from the shorts for destroying a great company!I hope your ill gotten gains go to a good cause like cancer research not a new BMW!Have a good life!

  • Report this Comment On January 23, 2014, at 12:29 PM, pmvflyer wrote:

    If I understand correctly, CRUS lost one chip, in one model of one Apple product (the ipad air). CRUS has chips in all the other current model apple iphones and ipads, the sales of which are expected to be very good. Why would sales of CRUS products go down when it seems clear that the sales of all these Apple products appear to be increasing? The earnings release and conference call for CRUS will be very interesting, to say the least. Agree that the outlook for CRUS is risky and volatile based on a dependence on Apple, yet that is true for all Apple chip suppliers. CRUS seems to have been singled out for a drubbing by many analysts and bloggers. Not sure what has made this company such a target for negative sentiment, other than the oft repeated loss of one slot, in one model of one product.

  • Report this Comment On January 24, 2014, at 11:29 AM, tradefortoys wrote:

    Motley Fool speaks from both sides of its mouth...one is bullish on CRUS another isnt...why dont you guys get your views/opinions straight??

    Motley Fool = very little credibility

  • Report this Comment On January 24, 2014, at 1:17 PM, Boony12 wrote:

    I am confused! A few weeks ago you were very high on CRUS for long term. We here nothing and all of a sudden it's a sell. I was prepared to hold for the long run. So which is it now?

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