Brad Buss, the CFO of Cyprus Semiconductor Corporation (NASDAQ:CY), purchased 10,000 shares of the company’s stock on January 25th at an average price of $9.97 per share. The stock currently trades at just over $10 per share, so it has not changed much since the insider buy. We track reported transactions by insiders because these people already depend on the company for their income. Because of this, and the ensuing risks of company-specific events, economic theory states that they should diversify their wealth by investing in other companies. Insider purchases therefore serve as a signal of strong confidence and helps explain why stocks bought by insiders tend to beat the market (read more about studies on insider trading). Our database of insider trading filings shows that Buss had previously bought shares in October 2012, at about the same time as one of the company’s Board members (see a history of insider purchases at Cypress); he has not sold any of his shares since May 2011, when the stock was trading above $20. Research more of Buss’s insider trading activity.
As implied by that previous paragraph, the past couple years have been rough on the $1.4 billion market cap semiconductor designer and manufacturer. In the last year, the stock is down 43% and the market price decreased in 2011 as well. Revenue declined 26% last quarter compared to the fourth quarter of 2011.
Wall Street analyst attitudes towards the company are that in terms of earnings per share this year will be more or less unchanged from 2012, when adjusting for special items. Consensus is for 53 cents in EPS, which implies a current-year P/E multiple of 19. After that point Cypress is expected to grow its earnings, and for example the forward earnings multiple (for 2014) is 12. Cypress also pays a dividend yield of 4.5%, though the company has only been paying regular dividends since June 2011. At the beginning of this year it reported $117 million in cash on its balance sheet, along with $232 million in debt. Billionaire Ken Griffin’s Citadel Investment Group owned 2.2 million shares of Cypress at the end of September, but that was after selling 73% of the shares it had owned three months earlier (find Griffin’s favorite stocks).
Other semiconductor companies are generally dependent on results a year or more out as well:
We can compare Cypress to a set of peers including Vishay Intertechnology (NYSE:VSH), Cavium Inc (NASDAQ:CAVM), Integrated Device Technology, Inc. (NASDAQ:IDTI), and Xilinx, Inc. (NASDAQ:XLNX). Vishay is the only one of these companies which does not feature earnings multiples in the 20s, as generally the current fiscal year or the one ending in early 2014 is not expected to be good for these other semiconductor companies. We’d note that this places Cypress in the same category as Cavium, IDT, and Xilinx; struggles over the next year before the sell-side predicts a turnaround. Of course, analysts may be being overoptimistic about these companies’ prospects over a year out.
Vishay, which we’d mentioned as being abnormally cheap in terms of earnings multiples, reported double-digit percentage declines in revenue and net income in its most recent quarterly report versus a year earlier. 12% of the outstanding shares are held short, reflecting bearish sentiment in the market even at the current price. The other three peers we’ve discussed generally have more modest revenue declines, though performance on the bottom line has been generally poor.
Buss has a good track record as an insider (at least in terms of his 2011 sales) and he seems to believe that the market has overreacted to Cypress’s poor results in the past several quarters. Still the company’s earnings are showing a steep drop and the valuation compared to trailing earnings is not particularly attractive. We are skeptical that the stock is actually a good buy and we think that investors should avoid imitating this purchase.
Disclosure: I own no shares in any stocks mentioned in this article.
