Cypress Semiconductor Corporation (NASDAQ:CY) shares are up more than 37.15% this year and recently increased 0.32% or $0.05 to settle at $15.69. Maxim Integrated Products, Inc. (NASDAQ:MXIM), on the other hand, is up 34.85% year to date as of 10/26/2017. It currently trades at $52.01 and has returned 3.83% during the past week.
Cypress Semiconductor Corporation (NASDAQ:CY) and Maxim Integrated Products, Inc. (NASDAQ:MXIM) are the two most active stocks in the Semiconductor – Broad Line industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CY to grow earnings at a 45.20% annual rate over the next 5 years. Comparatively, MXIM is expected to grow at a 14.65% 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., compared to an EBITDA margin of 36.92% for Maxim Integrated Products, Inc. (MXIM). CY’s ROI is -19.70% while MXIM has a ROI of 15.90%. The interpretation is that MXIM’s business generates a higher return on investment than CY’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.06. Comparatively, MXIM’s free cash flow per share was +0.36. On a percent-of-sales basis, CY’s free cash flow was -1.04% while MXIM converted 4.41% of its revenues into cash flow. This means that, for a given level of sales, MXIM is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. CY has a current ratio of 1.40 compared to 11.80 for MXIM. This means that MXIM 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 0.68 for MXIM. MXIM is therefore the more solvent of the two companies, and has lower financial risk.
CY trades at a forward P/E of 13.98, a P/B of 2.81, and a P/S of 2.38, compared to a forward P/E of 19.52, a P/B of 6.67, and a P/S of 6.40 for MXIM. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. CY is currently priced at a -10.6% to its one-year price target of 17.55. Comparatively, MXIM is 5.95% relative to its price target of 49.09. 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 2.50 for MXIM, which implies that analysts are more bullish on the outlook for MXIM.
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 MXIM’s beta is 1.08. MXIM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CY has a short ratio of 6.03 compared to a short interest of 2.26 for MXIM. This implies that the market is currently less bearish on the outlook for MXIM.
Maxim Integrated Products, Inc. (NASDAQ:MXIM) beats Cypress Semiconductor Corporation (NASDAQ:CY) on a total of 7 of the 14 factors compared between the two stocks. MXIM 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, MXIM has better sentiment signals based on short interest.