Don't remember if this was posted, from last Friday (and the reason I started DD)
individualinvestor.com
Stock of the Day: Cypress Semiconductor: Morphing
Before Our Eyes
Editor: Luciano Siracusano (10/16/00)
While most tech investors marveled Friday at the phenomenal moves by chipmakers PMC
Sierra (NASDAQ: PMCS - news) and Applied Micro Circuits (NASDAQ: AMCC -
news), a crop of second-tier names with more modest valuations were also turning up the afterburners.
Such was the case with Cypress Semiconductor (NYSE: CY - news), which climbed $6.75 on Friday, or more than 21%, to
close the week at $38.63.
Cypress Semiconductor designs integrated circuits, including programmable logic devices, SRAMs (static random access
memory) and high bandwidth memory solutions. Approximately 70% of the company's sales are now derived from the
fast-growing data and telecommunications markets.
Ever since 1998, when the California-based concern began to shift its offerings towards higher-margin products for these
markets, Cypress has expanded its customer list and improved profitability. The company has gained considerable traction in
supplying chips into the cellular handset and network-equipment markets.
Its six largest customers now include: Motorola (NYSE: MOT - news), Nortel Networks (NYSE: NT - news), Lucent
Technologies (NYSE: LU - news) , Cisco Systems (NASDAQ: CSCO - news), Alcatel (NASDAQ: ALA - news) and
3Com (NASDAQ: COMS - news) .
The company, which reports third-quarter results Tuesday before the opening, turned in an excellent first half of 2000 and
appears to have plenty of momentum heading into the end of the year.
In its second quarter, which ended July 2, Cypress increased sales 41% year-over-year, advancing diluted share profits 513%
to $0.49, versus $0.08 per share in the comparable period the year before. Backlog at the end of the July quarter was strong,
with the book-to-bill ratio standing at 1.36, portending robust demand for the second half of 2000.
With exceptional sequential revenue gains already posted by other integrated circuit makers, we believe that Cypress will likely
exceed Wall Street's consensus earnings per share expectation of $0.61.
With each passing quarter, the company further reduces its exposure to the commodity chip business. Not surprisingly, profit
margins continue to swell. In its fiscal second quarter, Cypress increased gross margins to 55%, up from 44% the previous
year. Operating margins jumped to 26.4%, up from 21.6% just three months earlier.
Although forecasts for global handset sales have been coming down in recent weeks, we believe Cypress will continue to
benefit from its relationship with Motorola, which is incorporating more Cypress content into its phones. In August, the
company announced that its low-power SRAM sales to Motorola would likely remain strong in the third and fourth quarter,
suggesting that overall sales to this key customer could grow 20% sequentially.
Cypress, with its strong SRAM presence, is poised to benefit from the trend toward incorporating flash memory and SRAMs
on one device. In an effort to keep costs down and save power, handset manufacturers are ready to adopt what is commonly
referred to in the chip industry as a ``stacked die solution.''
The term refers to a component that has both flash memory and SRAM. Cypress has several SRAM designs, which are well
suited for this application. We continue to believe that flash memory manufacturers will look to Cypress as a source of SRAM.
Although the environment for chips may not be as tight as it was six months ago, we still believe 2001 will shape up to be
another good year for semiconductor manufacturers. The most recent data supplied by the Semiconductor Industry
Association (SIA) confirms that sector growth is still going strong. In August, worldwide semiconductor sales reached $18.2
billion, a 52.7% increase from the same period last year.
Two other recent developments have also caught our eye.
In late August, Cypress announced that it would open a communications-product design center with Yamacraw, a
Georgia-funded broadband research and development initiative. Cypress will hire 100 design engineers specializing in
communications technologies to help Cypress penetrate new markets, including wireless telecommunications and optical
networking.
The August news followed the company's July agreement to acquire Silicon Light Machines, a privately held supplier of
microelectrochemical systems (MEMS) technology that has applications for fiber-optic networks. By purchasing the
fiber-optic component maker, Cypress gives itself exposure to a burgeoning industry still in its infancy. Silicon Light has been
quietly developing optics chips that could, ultimately, find their way into light-switching systems that do not involve electrical
conversion -- the next great frontier of optical networking.
Although Cypress Semiconductor's fundamental strengths make its stock attractive, it is the equity's current valuation that
sweetens an already enticing investment case.
At $38.63, Cypress shares are being valued at 17 times the $2.25 the company is projected to earn this year, and just 13.5
times the $2.86 Wall Street expects Cypress to earn in 2001. In a market where it is not easy to find companies trading below
their growth rates, Cypress is trading at a 50% discount to the 27% earnings-per-share growth it is likely to post in the coming
year.
Bottom Line
With the market mistakenly valuing Cypress Semiconductor as if it were a commodity manufacturer in a cyclical industry,
individual investors have a unique opportunity to buy into a legitimate communications company at bargain basement levels.
Should the company meet or exceed Wall Street's expectations Tuesday, we would take advantage of recent tech weakness
and do so. |
