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Why Cypress Semiconductor Corp. Fell 18% in October

By Anders Bylund – Nov 10, 2016 at 6:35PM

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Market makers overreacted to the microchip company's progressive business plan -- and then did it again over an insignificant earnings miss.

Arrow confusion

Image source: Getty Images.

What happened

Shares of Cypress Semiconductor (CY) fell 18% in October, according to data from S&P Global Market Intelligence.

So what

At the very start of the month, Cypress unveiled a recently adopted restructuring plan. Reducing the mixed-signal chip designer's headcount by 500 positions or roughly 8%, the plan will result in approximately $45 million on severance charges. Management is not expecting any significant cost savings because any additional cash unlocked by this reduction will be reinvested in new business initiatives and increased costs for the remaining employees.

That announcement started off Cypress shares on a long, slow 12% slide over the next three weeks.

At that point, Cypress announced its results for the third quarter. The report fell short of Wall Street's projections, and share prices fell another 8% in the last four days of October.

CY Chart

CY data by YCharts

Now what

The company is retooling to focus more clearly on high-growth opportunities in the industrial, Internet of Things, and automotive computing markets. Automotive chip sales accounted for 32% of Cypress' total third-quarter revenue and is growing at an annual clip of 25%.

The restructuring is another attempt to sharpen that growth-market focus, but investors may not have caught on to that point. And if you expected the headcount reduction to deliver the usual quick cost reductions, it certainly doesn't look like an attractive attempt at all. Cypress does have some recent acquisitions to run through the old synergy machinery, but that's simply not what the restructuring attempted to do.

Cypress CEO Hassane El-Khoury is rebuilding the company around the best available market opportunities.

"We are reallocating resources to where they matter most the future capital investments focused on our growth and core businesses," El-Khoury said in a conference call with analysts. "We've started making changes to our organization and management team to reduce complexity, streamline our operations, and help our customers get to market more quickly. As we move forward, we will reorganize or align our go-to-market strategy with our focused markets."

The market reaction to this thoughtful restructuring effort and modest earnings miss looks like a misunderstanding.

El-Khoury is planning for the long haul here. Meanwhile, Cypress shares are trading for a bargain-bin 14 times forward earnings. This is not a stock to run away from, but rather an interesting opportunity to explore the automotive computing and IoT markets from an affordable buy-in platform.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Cypress Semiconductor.

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