SEMICONDUCTORS

Why so many analysts are recommending this Austin company's stock

Cirrus Logic is surprising analysts with its sales and profit numbers, and its stock is nearing a record high. 

Posted November 3rd, 2016

When analysts got their hands on Cirrus Logic's earnings announcement last Thursday, they were surprised. Pleasantly surprised. 

The company reported sales and profit that had exceeded their expectations. Again. Sales were up 40 percent from the same time a a year ago, and profit, also known as net income, had soared year-over-year by more than 100 percent. 

In short, Austin-based Cirrus Logic isn't lacking for money, and investors can't get enough of their stock. 

Cirrus Logic's shares closed Thursday at $54.93 a share, up nearly 75 percent from a year ago and coming close to the company's all-time high of $57.25 set in 1995. 

The main reason the Austin chipmaker is doing so well is Apple's iPhone 7. Much of Cirrus Logic's fate is tied to Apple because the company supplies audio chips used in the iPhone. Cirrus typically declines to name its biggest customer, but it is well-known withing the industry that it is Apple. 

Cirrus Logic makes specialized low-power audio and voice chips, many of which are incorporated into smartphones, tablets and other portable devices, such as headphones. The company employs about 1,200 people worldwide, with more than 600 of those in Austin, company executives say.

I know what you might be thinking: How could Cirrus Logic be doing so well given that Apple's iPhone 7 sales aren't exactly setting the world on fire

To get a better grasp of why Cirrus Logic is flying high these days, I turned to three financial analysts and asked for their research notes. These numbers-filled documents offer opinions to investors about how the company is performing and usually set "price targets" for the stock.

Here's what they had to say:

Rajvindra Gill

Needham & Company

Price Target: $65

Recommendation: Buy

Gill notes that Cirrus Logic had a "beat and raise" quarter, meaning the company beat expectations and raised its estimates for financial performance in the next quarter. The company said sales were going to be 12 percent above what analysts were expecting, Gill notes.

Then he says something interesting: His company's "proprietary" Asia checks indicate higher Apple iPhone 7 build rates for the September and December quarters, which is very good news for Cirrus Logic. He's basically saying that Apple sales are doing better than expected. 

Gill notes that Cirrus Logic's stock has already risen quite a bit, but adds that "we believe there is further upside." Long-term, Gill says, they believe the company will further penetrate the Android market and there's even potential for more growth with the iPhone 8. 

Charlie Anderson

Dougherty & Company

Price Target: $65

Recommendation: Buy

In very simple terms, Anderson said, Cirrus Logic makes more money off the iPhone 7 than it did making audio chips for previous iPhones. (Anderson spoke by phone with the American-Statesman and also shared his research note.)

He said they estimate Cirrus Logic is getting about $6 per phone whereas it used to make about $3.50 per phone for an iPhone 6s. That's because Cirrus Logic is now supplying two chips for the iPhone 7 versus one for the iPhone 6s.

Anderson said the revenue coming from Apple in Cirrus Logic's second quarter was 10 percent higher than they expected. 

"Our sense is that... Cirrus Logic is seeing more contribution from the after-market headphone adapter for the iPhone 7 than we anticipated," Anderson wrote in his research note. He said the idea of getting rid of the headphone jack, and the degree to which other phone companies adopt it, is a good thing for the Austin chipmaker because they are already supplying these chips to Apple. 

Matthew Ramsay

Canaccord/Genuity

Price Target: $70

Recommendation: Buy

Ramsay notes that Cirrus Logic had a "strong" second quarter and provided guidance -- which is an estimate of financial results for the next quarter -- that was  "well above consensus." This means Cirrus Logic says it will do better in its next quarter than analysts thought. 

Ramsay notes that Apple's potential sales growth -- and Cirrus Logic's inroads in the Android market, as well as digital headsets -- are "budding opportunities. "Our positive thesis is very much intact," Ramsay wrote, basically saying "I told you so! Cirrus is doing really well!"

He adds that Cirrus' overall portfolio of products, which include audio chips, amplifiers and microphone products, is "well positioned to yield strong sales and earnings growth for the company for the next several years," even despite the slowdown of smartphone and iPhone growth.

Tom McCarthy Jr./FOR AMERICAN-STATESMANCirrus Logic's offices in Austin include an Employee Commons house with a band jam room, fitness area and a ping-pong and pool table.

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