Cirrus Logic (CRUS.O) shares shot up by more than 20% yesterday, after the company gave strong guidance for the rest of the year. The largest customer for Cirrus Logic is Apple, which accounts for over 60% of sales last year. The stock move up should not come as a huge surprise, after all the company has a strong StarMine Price Momentum score of 92. However, by other measures, this company may have some shortcomings.
The company has seen trailing 4Q operating margins fall from 22% in December 2010, to 18% in the most recently reported quarter. Those falling margins could be a concern in the longer term. In the last quarter, the company saw negative cash flow from operations (of $-1 million), however, the company spent its largest amount in 5 years on capital expenditures. With falling margins, these capital expenditures may not be as fruitful as initially anticipated.
Cirrus will have to grow earnings at 14% over the next 10 years to justify the current market price of $36.66. That may be overly optimistic, given that such a large part of the sales are tied to Apple, unless one can justify Apple growing at a similar pace. StarMine assigns a more conservative 11.7% growth rate for the next 10 years, after intelligently accounting for analyst biases. Using that rate, StarMine calculates the Intrinsic Value for the company at $30. However, given the company has a strong price momentum, the stock may very well continue to rise in the near future, but once the stock loses that momentum, look the for Cirrus stock to correct from its lofty valuations.
