"Tides Turning For C-Cube & Cypress" from briefing.com
Daily commentary Aug 29, 1997
It has been a tough week for the chip industry. But like a couple of spawning salmon,
C-Cube Microsystems (CUBE 30 1/4) and Cypress Semiconductor (CY 17 5/8)
have been swimming against the prevailing current. In fact, since hitting bottom in late June,
CUBE has rallied by 81%. Less dramatic but equally encouraging has been the slow but
sure climb in CY's shares. CY, which established a new 52-wk high on Thursday, has
gained 24% since late July. In today's Brief we will examine why the tides turned for these
former industry laggards, and if they can sustain their upward momentum?
C-CUBE
In Briefing's last report on this company dated 5/22/97, we noted that C-Cube's
announcement that revenues and earnings for the second quarter of FY97 would fall well
shy of street estimates would keep the stock on the defensive over the short-term. Our
downside target was in the 17 to 16 range. However, we also stated that discounted
valuations and the company's status as a leader in its industry suggested a brighter
long-term outlook. Given that the revenue shortfall appeared to be the result of temporary
factors and that the company remained well positioned to exploit the emerging DVD
marketplace, Briefing expected the stock to stage a rebound with an initial target of 25-27.
Well, the stock bottomed at 16 3/4 in late June and has been rallying ever since. Bolstered
by excitement over a new product, the stock blew through our upside target late last
week. The product line which has created all this excitement is C-Cube's Dvxpert
single-chip MPEG-2 encoder family. The Dvxpert is a computer chip which the company
says is the first to both record and play back video in digital format. The single chip
replaces up to 3 chips currently used to record and play back video in the MPEG-2 digital
format. Scientific-Atlanta and Victor Co. of Japan are testing the products, which C-Cube
expects to bring to market by early 1998. The new technology is expected to ultimately
lower the costs of DVD players thereby making them more attractive to consumers on a
widespread basis.
C-Cube is also benefiting from news that more and more Hollywood studios will be
releasing their titles on the DVD format. Though there are only about 100 titles currently
available, this figure is expected to double by the Christmas season. As the other major
studios jump on board the number of available titles will escalate quickly, and the DVD
revolution will finally commence in earnest.
While stiff competition will keep pressure on prices, C-CUBE should maintain its status as
an industry leader given its top quality management team and its commitment to innovation.
Given the speed and scope of the recent advance, we would not be surprised to see the
stock consolidate a bit over the next few weeks. Subsequently, look for C-Cube to
resume its rally and test the low-40s over the next 12-18 months.
Cypress
The turnaround at Cypress took a lot longer, as the stock was confined to about a 5 point
range since January of 1996. After a couple of false starts, CY finally emerged from its
basing formation over the past week and is poised for additional gains over the near- to
intermediate-term. Several factors have contributed to the improved outlook for CY. First,
SRAM prices finally stabilized as inventories were reduced. Second, the competitive
climate improved as a couple of players left the market. Third, the company's improved
manufacturing efficiencies and improved product mix will enable it to grow margins (as
long as SRAM prices don't collapse).
Due to these developments, the company should resume top line growth in FY97 and top
and bottom line growth in FY98. Based on its per share sales and earnings estimates for
FY98 of $8.40 and $0.90, the stock trades at 2.1 and 19.6x projected sales and earnings
- both discounts to the industry.
Given CY's improved product mix, more favorable competitive landscape, manufacturing
efficiencies and discounted valuations, Briefing expects the stock to press steadily higher
over the next 3- to Our upside target remains 21. |
