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Cirrus Logic: Too Much Is Too Much

CRUS shares have painted themselves into a proverbial corner


You’ve gotta love a stock that can soar 23% in one day, especially when the move is rooted on legitimately good news. On the flipside, what does a stock do for an encore after a move like that? For that matter, what are the odds of that stock even being able to hang on to that gain?

It’s a question Cirrus Logic (NASDAQ:CRUS) shareholders almost certainly are asking themselves today after the stock jumped from Monday’s close of $29.84 to Tuesday’s close of $36.77, despite what could actually be seen as a weak earnings announcement. Even crazier, the stock is up a whopping 132% year-to-date. Crazier still is the fact that even with the huge move, the forward-looking P/E still is a palatable 17.26.

What’s fueling this wild story? One word: Apple (NASDAQ:AAPL).

Apple’s influence doesn’t necessarily mean Cirrus is a buy right now, though.

The King of the Jungle in Apple’s Ecosystem

It wasn’t exactly a banner quarter for Cirrus. Earnings fell 24% on a year-over-year basis, on a 7% increase in revenue. Sequentially (compared to the prior quarter), sales and profits paled as well.

Yet, there it is … the stock topped off a huge run for the year with a huge jump Tuesday. Why? Because there’s no doubt as to why the top and bottom line has been lethargic. Moreover, there’s no doubt that big-time results are in the cards.

See, Cirrus is a big-time chip supplier for Apple’s iPhone. Although Apple has taken its sweet time in getting the iPhone 5 to the market, it looks like it’s going to be worth the wait. Advance demand for the iPhone 5 is stronger than we’ve seen for any of the prior versions of the iPhone, and though Apple has given us a sales forecast for the device, for perspective, it sold more than 30 million iPhones two quarters ago, and 26 million last quarter.

That demand is even more amazing considering some of the people most excited about the iPhone 5 are current owners of the iPhone 4.

Oh, and Cirrus makes chips for the iPad as well, which is all-new incremental revenue for Cirrus Logic. Apple sold 17 million iPads in calendar Q2.

Great, but what does it all mean for Cirrus?

The company says to expect revenue of somewhere between $170 million and $190 million next quarter, with gross margins right around 53%. The outlook didn’t include a net profit forecast, but given the company’s historical net margins, that could translate into a net profit of somewhere between $34 million and $38 million. Even the low ends of the outlook would be record-breakers.

Apple’s Coattails or Not, It’s Still a Stock

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Given the situation, it’s not hard to understand why the stock has been a rocket. From a value perspective, the forward-looking P/E of 17.26 (based on analysts’ expected 2013 earnings of $2.13 per share) is more than justified. From a technical perspective, though, Cirrus shares have painted themselves into a proverbial corner.

Never say never, but 23% jumps are a hard act to follow. It’s going to be near impossible for CRUS to move any higher from here anytime soon, especially with that huge gap it left behind at Tuesday’s opening bell. The would-be profit-takers already are licking their chops, and that’s with the company being just a mere hair away from perfect.

What if — and this is just a hypothetical — Cirrus Logic comes up even just a little short? The maximum fundamental value already is fully priced in, while the maximum technical value is more than pressing its luck. There’s no room for error.

There’s not a thing wrong with the company, mind you. Unfortunately, companies and their stocks are no longer one and the same. Investors will want to consider just how vulnerable their “investment” in Cirrus is if they’re just now getting in after this huge rally.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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