Cirrus Logic Will Make Sense of Your Net Worth

Fortune is out with its list of eight fastest growing technology companies. Second on the list is Cirrus Logic (NASDAQ: CRUS) that enjoyed 340% three-year annualized Earnings Per Share (EPS) growth thanks largely to its audio controller chips that account for 70% of its revenues.

But does rapid EPS growth mean Cirrus Logic stock is a sensible investment? Here are three reasons to consider it:

• Very low valuation. Cirrus Logic 's price-to-earnings-to-growth ratio of 0.25 (where a PEG of 1.0 is considered fairly priced) means its stock price is cheap. It currently has a P/E of 5.3, and its earnings per share are expected to grow 21.4% to $1.38 in fiscal 2013.
• Increasing sales and profits -- and decent balance sheet. Cirrus Logic has been increasing sales and profits. Its revenue has increased at a 19.4% annual rate from $182 million (2007) to $370 million (2011) while its net income has soared at a 64.3% rate from $28 million (2007) to $204 million (2011) — yielding a whopping 55% net profit margin due in part to a big tax credit. Its cash has fallen but is has almost no debt -- a mere $288,000. Specifically, its cash fell at a 7.2% annual rate from $266 million (2007) to $197 million (2011).
• Out-earning its cost of capital. Cirrus Logic is earning more than its cost of capital – and it’s making big progress. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Cirrus Logic 's EVA momentum was 16%, based on 2010 revenue of $221 million, and EVA that rose from 2010's $3 million to 2011's $39 million, using a 10% weighted average cost of capital. One reason not to invest:

One reason to avoid the stock:

• Poor earnings reports. Cirrus Logic has only been able beat analysts' expectations in two out of its past five earnings reports.

Cirrus Logic stock is at a low PEG and its actual earnings growth has been very high. But its high margins depend to a large extent on tax credits and it does not always exceed earnings expectations -- something that makes investors nervous. Nevertheless, as long as demand for its audio controller chip continues to rise, Cirrus Logic could make sense for your portfolio.