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Is Cirrus Logic's (CRUS) Place in Your Portfolio Justified?

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At times, it is prudent to hold on to certain stocks that have enough potential but are weighed down by tough market conditions. Cirrus Logic Inc. (CRUS - Free Report) seems to be one such stock, which investors should retain if they are looking to reap long-term benefits. Though the stock is facing a few headwinds at the moment, these are transitory in nature. There is enough scope for this Zacks Rank #3 (Hold) company to rebound in the long run.

In fact, Cirrus Logic stock has gained 10.3% in the last six months, outperforming the industry’s rally of 9.3%.

Factors In Favor of Cirrus Logic

Cirrus Logic reported better-than-expected first-quarter 2018 results. The company’s revenues and earnings also marked year-over-year improvement.

The company reported non-GAAP earnings per share of 81 cents per share, which surpassed the Zacks Consensus Estimate of 66 cents per share and increased 84.1% year over year. Total revenues increased approximately 23.6% year over year to $320.7 million and also marginally surpassed the Zacks Consensus Estimate of $320 million. The year-over-year increase was primarily owing to higher adoption of its products and strength in customer relationships.

Cirrus Logic has broadened product portfolio. Its chips are used in DVD players/recorders, disc drives, sound chips for computers, XBox, professional audio, mobile technologies and voice transmission.  In fiscal 2017, the company unveiled a variety of new products which includes audio codecs and DSPs, amplifiers, MEMS microphones, SoundClear embedded software, to name a few. Notably, the company is a major chipset provider to Apple Inc. (AAPL - Free Report) and Samsung as it generates a significant portion of revenues from them. Consequently, we believe that new products are likely to drive sales this year.

We also note that customer base has diversified in recent times. At the end of fiscal 2017, top 10 direct customers accounted for approximately 92% of its revenues as compared with 89% at the end of fiscal 2016. We believe that its diversified product line will aid it to expand customer base rapidly in the near future.

Being a fabless company, it does not have to own or operate foundries for the production of wafers. Instead, it works with third-party contractors and chip assemblers for the manufacturing, assembling and testing of products. It also frees up resources for research and development (R&D) activity that would otherwise have been locked up in capital assets. This approach permits the company to focus more on the designing, developing and marketing side, which reduces operational and financial risk.

Continued investments in the audio segment have helped the company to come up with innovative products from time to time. This aids it in attracting new customers and brings in additional revenues. Additionally, expansion in the LED market continues to drive growth.

The company has an expected EPS growth rate of 17.5%. Notably, the stock has delivered positive earnings surprises in the trailing four quarters with an average beat of 21.9%.

Risks Persist

Cirrus Logic generates a significant portion of revenues from Apple. This means that there is always an inherent risk of losing an Apple design contract, which will significantly hurt its financials. Moreover, sluggish economic growth, as well as IT spending may affect performance, going forward.

Furthermore, the company faces competition from the likes of Texas Instruments Inc. (TXN - Free Report) and STMicroelectronics N.V. (STM - Free Report) , which also remains a concern.

Our Take

We expect the aforementioned factors to help the company sustain strong momentum and stay afloat amid difficult times. Consequently, we suggest that investors hold on to the stock for the time being.

You can see the complete list of today’s Zacks #1 Rank stocks (Strong Buy) here.

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