Skip to main content

Cirrus Logic - overbought or room to run?

Cirrus Logic (CRUS) is a semiconductor manufacturer focused on mixed-signal and analog integrated circuits used in consumer and industrial markets. The company specializes in various audio/visual applications, DVD recorders/players, home theater systems, analog-to-digital and digital-to-analog converters, embedded microprocessors, etc.

Cirrus Logic was identified a couple of weeks ago in our Alert HQ market scan as a BUY. Since then it has gained well over 20%. Just take a look at the chart below.

Chart of CRUS
There appear to be several recent drivers for the excellent stock performance.

An SEC investigation in the company's stock option practices was concluded with no recommendations for enforcement actions.

The company is closing a Chinese subsidiary, Caretta Integrated Circuits, thus removing a management distraction.

The stock was upgraded by an analyst at Thomas Weisel Partners. The call was based on a report that Wolfson Microelectronics, a competitor of Cirrus, wasn't selected by a major customer for inclusion in the next generation of its portable media player. It is thought that the customer is Apple. The analyst is looking at this as an opportunity for Cirrus Logic to gain market share. Cirrus has already won a contract to provide chips for the iPod Classic and it probably has the inside track for the new version, as well.

All of these events transpired in March. The stock had already bottomed out and turned up by the beginning of March. In the middle of the month the stock really took off and moved up about 25%. Still, these events by themselves don't seem important enough to have pushed the stock up that much. It appears that the company is on track to start growing earnings again and that, I would submit, is the primary driver.

Over the last four years, the company's revenues have been slowly decreasing on an annual basis. Earnings on an annual basis have been quite erratic including a loss in 2005.

The picture brightens somewhat when we look at the last four sequential quarters. Revenues have been up the last two quarters, registering 14% and 4% quarter over quarter gains , respectively. Expenses have been problematical with elevated R&D and G&A costs causing operating earnings to swing negative in the most recent quarter. Nevertheless, the company posted income of $4.2 million in the most recent quarter versus a loss of $0.3 million in the previous quarter.

Over the last few quarters, the company has absorbed a number of restructuring charges and losses on sale of investments. The closing of the China subsidiary will hit the income statement for another $11 to $13 million in charges.

It is not surprising to see the stock's RSI firmly in the over-bought range given the recent run-up. Still, it is hard to see how the stock can hold on to these gains given the financial backdrop. Indeed, Monday's action saw the stock give back 4.5%. I can only assume that the flow of business from Apple is expected to turn into a tsunami.

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:


Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:


Results here were actually quite good and, to make things even better, the previous month was revised upward.

N…