Cypress Semiconductor Corporation (NASDAQ:CY) and Microchip Technology Incorporated (NASDAQ:MCHP) are the two most active stocks in the Semiconductor – Broad Line industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect CY to grow earnings at a 45.20% annual rate over the next 5 years. Comparatively, MCHP is expected to grow at a 23.00% annual rate. All else equal, CY’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. Cypress Semiconductor Corporation (CY) has an EBITDA margin of 11.88%, compared to an EBITDA margin of 30.47% for Microchip Technology Incorporated (MCHP). This suggests that MCHP underlying business is more profitable. CY’s ROI is -19.70% while MCHP has a ROI of 5.00%. The interpretation is that MCHP’s business generates a higher return on investment than CY’s.
Cash is king when it comes to investing. CY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.06. Comparatively, MCHP’s free cash flow per share was +0.99. On a percent-of-sales basis, CY’s free cash flow was -1.04% while MCHP converted 6.76% of its revenues into cash flow. This means that, for a given level of sales, MCHP is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CY has a current ratio of 1.40 compared to 3.10 for MCHP. This means that MCHP can more easily cover its most immediate liabilities over the next twelve months. CY’s debt-to-equity ratio is 0.65 versus a D/E of 0.88 for MCHP. MCHP is therefore the more solvent of the two companies, and has lower financial risk.
CY trades at a forward P/E of 13.76, a P/B of 2.77, and a P/S of 2.32, compared to a forward P/E of 16.17, a P/B of 6.14, and a P/S of 5.89 for MCHP. CY is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CY is currently priced at a -11.79% to its one-year price target of $17.55. Comparatively, MCHP is -6.84% relative to its price target of $98.00. This suggests that CY is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for CY and 1.90 for MCHP, which implies that analysts are more bullish on the outlook for CY.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CY has a beta of 2.03 and MCHP’s beta is 1.04. MCHP’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CY has a short ratio of 5.71 compared to a short interest of 14.14 for MCHP. This implies that the market is currently less bearish on the outlook for CY.
Microchip Technology Incorporated (NASDAQ:MCHP) beats Cypress Semiconductor Corporation (NASDAQ:CY) on a total of 7 of the 14 factors compared between the two stocks. MCHP is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, CY is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, SYMC has better sentiment signals based on short interest.