Weekly Equity Idea Highlight - 2018 04 18
CRUS has done an excellent job maintaining and improving their business over the past eight years as they have grown in both the Apple and Android ecosystem, using their premium offerings to maintain strong profitability. However, the market is expecting both their ability to drive growth in market share, and profitability sustainability, to severely erode going forward, with UAFRS-based (Uniform) ROA falling by half and growth slowing too.However, CRUS management's alignment, unlike so many semiconductor firms that are focused on growth, actually aligns management to focus on margin improvement to maintain profitability, with only a secondary focus on growth. This signals that management's focus will correctly be on maintaining profitability in the face of market pessimism.
During the most recent Q3 call (2/5) management was confident about innovation and how differentiated their products are, but they did appear to expect customers to pressure them and other suppliers on pricing based on the current market environment. These markers highlight that the company does continue to innovate and have strong competitive advantages, but near-term there may be customer driven challenges.
Considering low market expectations, sustained strong ROA', favorable management alignment and solid positioning, even with near-term potential headwinds, there appears to be equity upside potential for CRUS.
Cirrus Logic focuses on low-power integrated circuits (ICs) for audio, voice and other signal-processing applications. The company's product lines include: Portable Products, including codecs, which are chips that integrate analog-to-digital converters (ADCs) and digital-to-analog converters (DACs) into a single IC, smart codecs, which are codecs with digital signal processing integrated, amplifiers, micro-electromechanical systems microphones, haptic drivers, standalone digital signal processors, and its SoundClear? technology, which includes a portfolio of tools, software and algorithms; and Non-Portable and Other Products, which include ICs, codecs, ADCs, DACs, digital interfaces and amplifiers.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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