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Why You Should Buy Cirrus Logic

June 30, 2014 | About:

Cirrus Logic (NASDAQ:CRUS) recently released its third-quarter results that turned out to be a disappointment due to a shift in the pricing structure and the product mix. Cirrus' revenue dropped 29%, and investors will certainly not be satisfied by the results. However, CEO Jason Rhode expects improvement in Cirrus' performance in the future with the adoption of voice as a key interface for mobile devices. Despite weak results, the company is still positive regarding its future, and since Apple (AAPL) is a major customer of Cirrus, it can continue growing due to new devices and penetration into new markets. Also, Cirrus is targeting new markets such as wearable devices.

Brief review of the results

Cirrus Logic Inc's net income in its fiscal third quarter fell 39%, and it projected disappointing revenue for the next quarter as well. Revenue in the previous quarter fell 29% to $218.9 million, above analysts' forecast of $213.3 million. But the bottom line that Cirrus' business is shrinking cannot be denied.

But CEO Jason Rhode is still looking at improvements in Cirrus' performance in the future. Let us take a look at these initiatives and see if Cirrus can indeed turnaround.

Apple's growth to favor Cirrus

Apple, which is Cirrus's biggest client with more than 80% of revenues, will go a long way in improving the chip maker's performance. Apple is ready to introduce a number of new devices this year. There is strong speculation in the market that Apple will go big with its next iPhones. Analysts and sources seem to agree on the fact that Apple will certainly offer a larger-screen device than the current display to compete against Android rivals who moved on to bigger devices long ago.

WSJ says that its sources have knowledge about two iPhones. One will come with a screen size more than 4.5 inches and the other will have a display size greater than 5 inches. Apple is also expected to go all metallic with its next slate of iPhones by ditching the plastic casing in the iPhone 5C. These innovations should enable Apple to tap the Chinese market with greater efficiency as well. Post the China Mobile (NYSE:CHL) partnership, Apple's iPhone sales could grow by as much as 24 million this year. This is a market where consumers favor devices with bigger screens, so Apple and Cirrus should benefit with the bigger phones.

Other moves

Cirrus is focusing on various segments to improve profitability. It is introducing a number of 55-nanometer products to tap exciting opportunities in audio and voice applications. These products are expected to be key contributors to future revenue growth by 2015. Further, the company is targeting at using voice interface as a catalyst to fuel growth in portable audio also.

Cirrus is also seeking opportunities in Android mobile and automobiles. The company has come up with a design win in Xiaomi's Mi3, one of the best selling phones in China. However, management sees voice control as their biggest opportunity. In addition, Cirrus is also expecting growth in the automobile market as Google (NASDAQ:GOOG) and Apple are looking to put their operating systems in the cars. This will give rise to the need for voice interface, and Cirrus is aiming to provide the same with the new products.

According to Cirrus, its

ultra-low power Cirrus Logic CS48LV12/13 voice processors with integrated SoundClear® technology elevate the user experience and improve voice recognition accuracy in smartphones, tablets and wearables by improving voice quality, eliminating background noise and delivering clear communications in any environment.

Innovations like these can surely help Cirrus get its growth back on track.

Cheap valuation and conclusion

Despite the present woes, the company is in a strong cash position with 26%of its market cap in cash. In addition, the company also has a buyback authorization in place, which will help it in boosting its earnings and come back to a profitable position. Cirrus is also very cheap at a P/E ratio of 13. The company aspires to get better in the future, and investors should think of betting on Cirrus' turnaround as it could become a value play in the future.

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