Cypress Semiconductor CY
October 30, 2007 - 12:43am EST by
rrackam836
2007 2008
Price: 35.83 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 5,530 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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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
    sort by   Expand   New

    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

    Messages


    SubjectOptions prevent spin-off
    Entry11/01/2007 01:36 AM
    MemberCoyote05
    Let me add my 2c.

    It looks to me that it is very unlikely that a spin-off would take place (even if there was a tax-efficient way to do it). Options provide a significant disincentive for management to do it (although that would be the right thing to do for the shareholders). Clearly a spin-off is the easiest way to unlock the value. However, option holders (management and board members) would miss the benefit of a spin-off. As of 12/31/06 there were 32.15 million options outstanding ($15.5 avg strike), of which 19.7 million were exercisable ($16 avg strike). Thus, even assuming a $1b (plus cash) fair value for the semi biz, post spin-off the stock would trade at about $6; with all options out-of-the money. This translates in a loss of value to option holders of no less than $650 million! (32.15 million options x ($35.5 current stock price -$15.5 strike price))

    This is another great example of why options are a really bad idea as a form of compensation; as they operate to the detriment of shareholders.

    What would be your view on the likelihood of mgmt letting go of all that option value?

    VL

    SubjectRe: Options prevent spin-off
    Entry11/01/2007 02:29 AM
    Memberrrackam836
    The options would be repriced. NYSE rules state that

    "Canceling an option at a time when its strike price exceeds the fair market value of the underlying stock, in exchange for another option, restricted stock, or other equity, unless the cancellation and exchange occurs in connection with a merger, acquisition, spin-off or other similar corporate transaction."

    imho it make sense. Basically, today options are so prevelant, if what you are saying is true, then no company will do any spinoff, let alone CY.

    Subjectoption adjustment on spinoffs
    Entry11/01/2007 11:32 AM
    Membertyler939
    I agree w/ rrackham. Executive options have been adjusted in every spinoff I have seen, and I've seen a lot.

    Typically, each vested option is split into two options, with the prices based on the prices of the two stocks after the spin. That increases the value of the options in management's hand. Non-vested options are usually adjusted so that each exec will have options in the company for which he/she works, with the sharecount adjusted based on the ratio of the post-spin price to the pre-spin price.

    If CY sells SPWR, there's no need to adjust options, since the company gets the cash. The most likely use of the cash would be increasing CY's share buybacks.

    In any event, management was very clear in their conference calls that they want to get out of SPWR, but they don't want to pay the tax. They can do a tax free spin in November 2009, and have said that they are continually evaluating options for a spin or sale before then.

    Subjectoption adjustment correction
    Entry11/01/2007 11:44 AM
    Membertyler939
    My apologies, I didn't proofread my last post. What I meant to say about vested executive stock options was:

    Typically, each vested executive option becomes an option to purchase shares in the two companies. Occasionally, vested options are split into two options, with the prices based on the prices of the two stocks after the spin; that increases the value of the options in management's hand.
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