My Favorite Stock: Cirrus Logic
Sounds Like a Winner
Nasdaq: CRUS
$24.20
(as of 05/08/01 )
P/E
33.6 PSR
2.3
ROE
67.5% BETA
1.48
Debt/Eq.
0.02
May 9, 2001 - Many chip stocks began a solid rebound in April, but Cirrus Logic (Nasdaq:CRUS) has been truly exceptional in its comeback. The stock is up to $24.20 now from a low of $9.25 just a month ago. Improving sentiment toward the semiconductor industry is part of the picture, but there are some company-specific developments also spurring investors to see a bargain in Cirrus. Simply put, this company executed well on a turnaround plan--a rare feat in high-tech--and now it's positioned to reap the benefits when the semiconductor industry cycles up again.
Cirrus Logic went into turnaround mode several years ago after a rough time where product delays caused it to lose business and ultimately bail out of certain markets. The company reorganized and set its focus on niche markets for analog and digital signal processing (DSP) semiconductors, particularly audio and entertainment applications where it could build on its expertise in digital audio, and it really got back on track in the past year.
There was no escaping the chip industry collapse toward the end of 2000, but investors seem to like the way this company's evolution continues even now. Last week Cirrus announced that it will stop making chips for magnetic storage (i.e., disk drives), a lower-margin business tied to PC demand, and focus on its fast-growing consumer audio and entertainment business. Analysts cheered the move even though it will mean a short-term drop in revenues and earnings per share.
Cirrus now makes chips for Internet embedded processors, communications, optical storage, and some up-and-coming consumer electronics end markets such as DVD players, MP3 players, CD-RW (rewritable compact discs) and set-top boxes. Cirrus just landed a deal to supply DVD components for Microsoft's X-Box gaming console due out later this year. Cirrus Logic also has strong relationships with customers such as Sony, Matsushita and S3 which uses Cirrus products in its Diamond Rio MP3 players.
Last year the company unveiled a new chip family designed for what it calls Home Digital Audio Jukebox appliances. The integrated system enables direct Internet access without the need for a PC to download music in MP3 format, as well as from CDs and radio, store and organize it, and play different selections simultaneously in various locations throughout a home. The system includes security features to ensure appropriate digital rights management.
After a terrible trend of declining revenues and big losses a few years ago, the company got back on the growth track in Fiscal Year 2001 (ended March 30) with sales of $779 million, up 38% from FY00, and a profit of 72 cents per share. But as with most chip companies in March, Cirrus Logic's stock plunged when it warned that business was slowing and earnings would be well below analyst forecasts. Now analysts expect a slight drop in EPS for the current fiscal year, but that's much better than the huge declines expected for many of Cirrus' peers in the semiconductor industry.
Cirrus still has some distance to cover in terms of restoring investor confidence, but the company's decision to exit the hard drive business and focus on consumer audio and entertainment was very well received. If Cirrus can capitalize on its leadership position in some of the newer markets like Internet audio appliances, CD-RW and set-top boxes, the growth prospects are compelling and the stock could really take off again.
Turnaround stories are always risky, especially in technology where product cycles are extremely fast and the slightest delay with a new product can be devastating. Cirrus seems to be on the right track, though, and it is focusing on some promising new end markets in consumer electronics where its expertise in digital audio could pay off nicely.
- James Hale
Regards,
Pokyscon. |
