Value Investors Club / Cypress Semiconductor (CY)

Description

Description: -

The Cypress stub is cheap again.

SPWR has gone up 47% 9/30/2007 (CY’s Q3 end) while CY has just gained 23.5%). This has been likely due to the rise in the price of oil and the fact that SPWR is seen as an “alternative energy” source. No matter, adjusting for CY’s ownership in SPWR, the CY stub is trading at a negative EV (or a maybe even a small positive EV of double digit millions if you want to be ultraconservative).

CY’s business itself is well known and a lot of brokerage houses cover it (also we can read mpk391’s old CY writeup for background) – so I won’t go over it again.

Core CY did $855 million in sales in FY 2006 and $827 million TTM.

Here is a small table –

	Current	9/30/2007	7/1/2007	4/1/2007	12/31/2006	10/1/2006	7/2/2006	4/2/2006	1/2/2006

Weighted average shares outstanding-diluted	158,857	158,857	158,857	155,699	179,271	179,087	145,306	144,915	133,188
Year end shares outstanding	152,808	152,808	152,808	152,675	144,844	141,898	140,941	139,345	137,036
Ownership in Sunpower	44.50	44.50	44.50	52.00	52.00	52.00	52.00	52.00	52.00


Stock Price
Cypress	35.83	29.21	24.69	19.33	16.87	19.59	13.95	17.11	15.79
Sunpower	121.84	82.82	67.57	48.75	37.17	26.95	27.39	35.67	32.57

Market Cap
Cypress diluted	5,691.85	4,640.21	3,922.18	3,009.66	3,024.30	3,508.31	2,027.02	2,479.50	2,103.04
Cypress outstanding	5,475.11	4,463.52	3,772.83	2,951.21	2,443.52	2,779.78	1,966.13	2,384.19	2,163.80
Sunpower ownership	5,421.88	3,685.49	3,006.87	2,535.00	1,932.84	1,401.40	1,424.28	1,854.84	1,693.64

Stub market value
diluted	269.97	954.72	915.31	474.66	1,091.46	2,106.91	602.74	624.66	409.40
outstanding	53.23	778.03	765.96	416.21	510.68	1,378.38	541.85	529.35	470.16

Cypress total sales	1452146	1452146	1,292,818	1,185,268	1,091,553	1,043,054	979,959	935,229	886,396
Sunpower sales	624956	624956	455,970	336,899	236,510	191,342	147,897	109,602	78,736
Cypress stub sales	827.19	827.19	836.85	848.37	855.04	851.71	832.06	825.63	807.66


Net Cypress Cash	942,121	942,121	810,032	283,086	398,082	371,277	319,946	233,958	186,716
Net Cypress Debt	600,000	600,000	600,000	398,996	598,997	598,997	598,997	599,997	599,997

Stub EV
diluted	(72)	613	705	591	1,292	2,335	882	991	823
outstanding	(288.89)	435.91	555.93	532.12	711.59	1,606.10	820.90	895.39	883.44

Stub EV/Sales
diluted	(0.09)	0.74	0.84	0.70	1.51	2.74	1.06	1.20	1.02
outstanding	(0.35)	0.53	0.66	0.63	0.83	1.89	0.99	1.08	1.09

Basically, 04/1/2007 timeframe would have been a good time to have put on this stub. But as can be seen, the market is pricing core CY at a negative EV. If we get to an EV/Sales of even 0.74, that seems to be a nice profit. Comparable semi companies trade at 1-3x EV/sales. Note, if we use Lehman’s figures for shares outstanding (I believe he is adding options excercisable), EV becomes - $226 million or an EV/Sales of 0.27 – still cheap.

Note that there are changes afoot that may be a catalyst for this stock. As recently as last December, Robert Chapman pressured (unsuccessfully) CY to spin off SPWR. There are apparently some concerns about whether this spinoff can be tax free and there is a recent Lehman report dated October 09, 2006, about whether “Can Cypress Spin-off Sunpower?”. Also, note the recent 13-D filed by Thirdpoint – another well regarded activist.

Anyway, I am not a tax expert but at the recent price looks to me like we don't need to calculate EV to the last decimal point, and can as well punt on these issues entirely.

The trade is $1 long CY, $0.95-$1 short SPWR.

Catalyst

a) Market recognizes embedded value of CY
b) Continues business momentum on the part of CY
c) Shareholder Activism

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			2007	2008
Price:	35.83	EPS
Shares Out. (in M):	0	P/E
Market Cap (in $M):	5,530	P/FCF
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	0	TEV/EBIT