You've seen it before: Quarterly earnings miss analyst estimates, or quarter-versus-quarter comparisons are less than ideal, and the inevitable happens: The stock price drops like a log, followed by headlines screaming "ABC Company in Dire Straits!" If you're a value investor, these situations are ideal investment opportunities, since the decline in share price feeds on itself, gaining momentum until the stock is oversold.
But even if you're not a value investor, you need to look at the craziness surrounding Cirrus Logic (Nasdaq: CRUS). It's not often you come across a company that nearly doubles revenues versus the prior year's quarter and then ends the trading day down over 12%, and has trading halted because of the sell-off , as Cirrus Logic did on Nov. 1. And the strangeness continued into the next day's trading, which began with another 3% drop in Cirrus share price. Surely, there must be some method to this madness, right?
First, the numbers
Though I'd love to share some negatives, if for no other reason than to explain Cirrus Logic's negative stock-price movement, you really have to stretch to find anything to complain about. Cirrus Logic's fiscal 2013's Q2 revenues came in just shy of $194 million -- that's a 91% improvement compared with last year, and more than twice the prior quarter's sales results.
Just as impressively, Cirrus Logic's increase in revenues made it to the bottom line, too. Diluted earnings per share came in at $0.51 a share, and non-GAAP earnings were $0.79 -- three times last year's quarter, and well above analyst expectations. Cirrus was also able to add to its balance sheet, upping available cash to nearly $68 million, a $28 million increase compared with fiscal Q2 of 2012.
Also worth noting is that Cirrus Logic's dramatic increase in earnings came from sales, not simply cutting overhead, something we've seen a lot of during this difficult global economic environment. As it happens, Cirrus actually bumped up R&D spending by 50% compared with last year and still killed it on both the top and bottom lines. How? Cirrus simply sold a whole lot of product, thanks to its friends over at Apple (Nasdaq: AAPL).
So, what's the problem?
A couple of concerns, which are a stretch at best, have been cited as reasons for Cirrus Logic's precipitous decline. This first is that a majority of Cirrus Logic's revenues are derived from the chips sold in iPads, iPhones, and the like, so delivery or sales problems over at Apple could equate to revenue problems at Cirrus. But as the financial results demonstrated, that wasn't a problem Cirrus had to deal with this past quarter, and the success of the latest iPhone bodes well for Cirrus Logic's Q3.
Secondly, some analysts raised margin concerns, among them Felt & Co., which downgraded Cirrus to a "hold" from a "strong buy." Of course, the lowering of the Cirrus Logic target price to $44 is still more than 25% above its current levels, not to mention gross margins are 52% in the most recent quarter, just as they were last year. With the increased R&D spending and costs associated with all those additional sales, the fact Cirrus is able to maintain its gross margins is a win in my book.
Compared with key competitors, it could be argued that Cirrus Logic is fairly expensive, at least on a trailing basis. At 21 times earnings, Cirrus is on the high end of the sector. Analog Devices (Nasdaq: ADI) and Texas Instruments (Nasdaq: TXN) both play in the same sandbox as Cirrus Logic but are trading at less than 19 times trailing earnings. Price-to-sales ratios also favor TI and Analog Devices compared with Cirrus, and a lack of a dividend yield may also be turn-off for some investors.
What's an investor to do?
Those margins that were such a concern for some Cirrus Logic analysts? Cirrus' gross margins, net profit margins, and return on investment results, though not necessarily the highest, either compare favorably with, or beat, both Analog Devices and Texas Instruments. And on a forward basis, Cirrus Logic's 10.4 P/E is dirt cheap.
When it's all said and done, trying to make sense of Cirrus Logic's trading these past couple of days is an exercise in futility -- it simply makes no sense. So, rather than beat your head against the wall trying to figure it out, take advantage of it. Cirrus is a sound, and affordable, play on all things Apple, and it has just gotten ridiculously cheap -- for no reason whatsoever.
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