Cirrus Logic: A Turnaround That You Shouldn't Miss

Cirrus Logic (NASDAQ: CRUS  ) shares are up 20% in 2014 as the Apple (NASDAQ: AAPL  ) supplier is focusing aggressively on a turnaround. Since Cirrus generates around 80% of its sales from Apple, the company is in a good position to benefit from the upcoming iPhones. Cirrus also recently announced that it is acquiring U.K.-based Wolfson Microelectronics for $489 million to improve its competitive position and gain a foothold at Samsung.  The audio chipmaker's recent results were also better than expected, and looking ahead it could improve further.

Let's take a look at the reasons why Cirrus can go higher.

The Wolfson purchase looks like a good move
Cirrus' decision to acquire Wolfson is a smart one as it is a key supplier to Samsung. Wolfson has supplied chips for various Samsung smartphones and tablets, including the Galaxy S5. The deal is expected to close in the second half of the fiscal year, enabling Cirrus to benefit from Samsung's devices going forward. The acquisition will also go on to strengthen Cirrus' audio division and enable it to benefit from the rise of wearable devices.

Samsung is using Wolfson's WM5110 mobile 24-bit/192kHz Digital-to-Analog Converter (DAC) chip in the Galaxy S5. Wolfson is providing a low power-consumption, high definition (HD) audio processor with advanced Digital Signal Processing (DSP) features to Samsung for the device. Hence, the company seems to have robust products that will benefit Cirrus going forward.

Also, the Samsung Galaxy S5 is selling at a good rate. It has already outperformed its predecessor, hitting 1 million in sales just 11 days after launch. Comparatively, the Galaxy S4 took 16 days to reach the landmark. So, the current flagship could be well on its way to selling more units than the Galaxy S4.

Therefore, Cirrus Logic's strategic move to buy Wolfson Microelectronics is looking like a good move right now. The audio chip maker has now diversified its business by adding Samsung to its client list and reducing some of its reliance on Apple. In addition, Wolfson is expected to enhance Cirrus Logic's core business with improved audio signal processing components. It will also help the company to differentiate its products with software capabilities and new product categories such as MEMS microphones. 

Apple and wearables
However, Cirrus is still heavily reliant on Apple for much of its revenue. This means that Cirrus will be an obvious beneficiary of Apple's iPhone sales. Apple's iPhone unit sales were up 15% year-on-year in the second quarter. This number is expected to increase going forward as Apple refreshes its iPhone this year and adds two large-screen iPhones to its portfolio.

A larger iPhone is expected to see an increase in demand, especially in markets such as China where bigger phones are popular. Also, China Economic Daily News is projecting that Apple will produce 80 million units of the next iPhone this year, which will result in more demand for Cirrus' products.

Cirrus is also targeting the market for wearable devices. As per an ABI Research report, 485 million wearable computing devices will be shipped by 2018. To tap this opportunity, Cirrus is expanding its footprint in the portable audio market. The chip maker has an extensive product pipeline of advanced node products focused on audio and voice applications.

Bottom line
Finally, Cirrus' fundamentals are very attractive. The company trades at a cheap trailing P/E of 13, has an impressive operating margin of 22%, and does not have any debt. It might be seeing a decline in earnings and revenue at present, but it is making some impressive moves to turn the business around. Because of this, investors should consider Cirrus Logic for their portfolios as it seems to be a good turnaround candidate.

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  • Report this Comment On May 27, 2014, at 9:19 PM, dgalbers wrote:

    Wait a minute!

    I thought it was the Fool that not too long ago claimed:

    Cirrus Logic paid TOO much for Wolfson.

    Cirrus Logic deriving 80% of its revenue from Apple was a bad thing.

    Who says that wearables or the new smart home is even going to need any or any more Cirrus Logic chips? Last I knew Cirrus was audio codecs not infrared or ultrasonic remote control.

    So now CIrrus is good before it was bad?

    Perhaps Mötley Fool should change its name to "A Fool's Waffle Shop."

    By the way I have liked Cirrus for a long time, but never because of anything "the Fool" or Cramer says.

    Presently, I have no position in Cirrus, but I might get one.

  • Report this Comment On May 28, 2014, at 3:20 PM, tomtk wrote:

    According to Wolfson's Mike Hickey, Wolfson's recent *losses* are due to losing out in the S4 and S5 because of the transition from 3G to 4G which apparently caught them flat-footed. How can they both be in the phones and not in them? There are different versions of the phones, one based on Qualcomm's 4G LTE Snapdragon, the other on Samsung's Exynos. Wolfson appears only in the Exynos version, while the Qualcomm version uses the Qualcomm codec as do competing flagship phones from Google, LG, HTC, etc. So Wolfson would have to take this socket away from Qualcomm or hope that Samsung moves to Exynos for 4G, and I have no idea if the latter is in the cards. Regardless, they will have to compete with Audience's new codec, which meshes nicely with the Earsmart tech which Samsung uses.

    On the plus side, Wolfson's latest earnings press release had Hickey saying, "We are on track for a strong recovery in revenue as LTE smartphone platforms that do include Wolfson products are expected to come to market in the second half. Our position as audio partner of choice for most LTE silicon platform vendors has been further strengthened by our collaboration with MediaTek for its LTE solutions, which should also improve our position in the fast-growing Chinese smartphone and tablet market where MediaTek has strong market share." That said, I don't know how "they're the audio partner of choice for most LTE silicon platform vendors" when they're losing money because they weren't ready for the 3G to LTE transition.

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