For suppliers, becoming a key technology provider to Apple Inc. (AAPL, Financial) is usually a dream.
But for Cirrus Logic Inc. (CRUS, Financial), it has been more of a nightmare lately. On April 11, Ming-Chi Kuo, an influential analyst at TF International Securities, reported what could be bad news for Cirrus.
In his MacRumors blog, he suggested the next-generation iPhone 15 Pro and iPhone 15 ProMax might not switch to solid-state volume buttons, as earlier expected: "My latest survey indicates that due to unresolved technical issues before mass production, both high-end iPhone 15 Pro models (Pro & Pro Max) will abandon the closely-watched solid-state button design and revert to the traditional physical button design."
Who makes those solid-state buttons and would have supplied them to Apple? Cirrus, of course, and when the analyst’s news came out, some of its investors took off.
The vertical line on this six-month price chart shows the stock gapping down on April 12. Of course, it started declining a couple of weeks before that news came out. And it continued to languish after the short-term money moved on to other stocks.
What should we long-term investors think of Cirrus? Could it be a value trap, or could it be an opportunity to buy at a discounted price?
Since our long-term outlook depends on the fundamentals rather than recent news or chart analysis, we review its financial strength, profitability, growth and valuation.
Overall, Cirrus has a strong fundamentals base, as displayed by the GF Score of 90 out of 100.
As the chart shows, it does well on each of the fundamental criteria listed above. Starting with financial strength, it scores a 9 out of 10 ranking. That score is based on its debt-to-revenue ratio, interest coverage ratio and Altman Z-Score. Given the high scores for interest coverage (508.72) and Altman Z-Score (8.09), there is no reason to be concerned about its financial viability.
Cirrus enjoys a similarly high ranking for profitability, 9 out of 10. This score is based on the operating margin, the five-year trend of the operating margin, the Piotroski F-Score and the predictability rank.
As this 10-year chart shows, the operating margin of 18.20% is just above its median for the past decade.
As for its Piotroski F-Score, it is adequate at 6 out of 9, while its predictability ranking, based on past revenue and Ebitda growth, clocks in at 3.5 out five stars.
The growth rank is less positive than the financial strength and profitability rankings. At 7 out of 10, it is a middling score, reflecting slower revenue or Ebitda growth over three and five years, and the predictability of the five-year growth rate.
Both revenue growth and Ebitda growth appear respectable over the past three years at 16.10% and 20.70%, respectively. Over five years, the growth rates are lower, at 9.50% for revenue and 14.10% for Ebitda.
For investors who use earnings growth as an indicator of future share prices, the news is mixed. As you will recall, the share price began slipping at the end of March, which is also the end of the company’s fiscal year. These are its earnings per share without non-recurring items for the past three years and Morningstar Inc. (MORN, Financial) analyst predictions for fiscal 2024 and 2025:
- 2021: $3.62
- 2022: $5.52
- 2023: $3.09
- 2024 (estimate): $5.38
- 2025 (estimate): $6.33
Investors would not have known in early March that a much lower earnings per share without NRI was coming, but might have guessed at it. After all, traders speculate constantly on the direction of quarterly and annual earnings.
As we saw in the price chart above, shares have lost a significant amount of their value since the end of March. Does this make it a potential value stock?
According to the GF Value chart, Cirrus is modestly undervalued. It reaches that conclusion by comparing the current share price ($72.28 at the close on May 11) to the GF Value estimated value of $104.34.
The price-to-earnings ratio is 25.50, which suggests overvaluation, while the PEG ratio at 1.81 is near the high end of the fair-price range.
Earnings-based discounted cash flow also registers overvaluation, suggesting that its intrinsic value is just $55.76.
Still, if we look at a 10-year price chart, we see the share price has fallen significantly, not only in terms of its recent highs but also against the trendline. This, I would argue, provides evidence of undervaluation:
Given that 79% of its fiscal 2022 revenue came from Apple (it was 83% in fiscal 2021), we also must consider that company’s future in looking at Cirrus’ future.
And Apple looks good. It has only a modest amount of debt, giving it an interest coverage ratio of 32.28 and an Altman Z-Score of 8.37. It is highly profitable, with industry-leading margins and returns on equity, assets and invested capital.
Apple continues to grow rapidly, with revenue growth averaging 20.00% per year over the past three years, Ebitda up by an average of 22.80%, and EPS without NRI increasing by an average of 27.20% per year.
If Cirrus has hitched itself to a star, it certainly picked a bright one.
Putting all the pieces together, we have a depressed share price and little debt, which adds up to a potential value stock. Backing up our faith in the stock are its high scores for the fundamentals and its commitment to one of this century’s greatest corporations.
