The stock of Cirrus Logic (NAS:CRUS, 30-year Financials) appears to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $73 per share and the market cap of $4.2 billion, Cirrus Logic stock is estimated to be modestly overvalued. GF Value for Cirrus Logic is shown in the chart below.
Because Cirrus Logic is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 2.29% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Cirrus Logic has a cash-to-debt ratio of 2.57, which which ranks in the middle range of the companies in Semiconductors industry. The overall financial strength of Cirrus Logic is 8 out of 10, which indicates that the financial strength of Cirrus Logic is strong. This is the debt and cash of Cirrus Logic over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Cirrus Logic has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $1.4 billion and earnings of $3.37 a share. Its operating margin of 18.06% better than 80% of the companies in Semiconductors industry. Overall, GuruFocus ranks Cirrus Logic's profitability as strong. This is the revenue and net income of Cirrus Logic over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Cirrus Logic is -2.9%, which ranks worse than 66% of the companies in Semiconductors industry. The 3-year average EBITDA growth rate is -10.3%, which ranks worse than 80% of the companies in Semiconductors industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Cirrus Logic's ROIC was 17.81, while its WACC came in at 7.49. The historical ROIC vs WACC comparison of Cirrus Logic is shown below:
In conclusion, the stock of Cirrus Logic (NAS:CRUS, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks worse than 80% of the companies in Semiconductors industry. To learn more about Cirrus Logic stock, you can check out its 30-year Financials here.
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