Why This Stock Looks Like a Buy

This year, we've seen a number of companies taking the buyback route in a bid to push up the price of their stocks. They may argue that this is a way of returning cash to the shareholders or providing some impetus to their undervalued stock. Cypress Semiconductor (NAS: CY) recently entered this buyback club after its management approved a new stock-repurchase program to the tune of $400 million - about a sixth of its entire market cap. The company said it had completed last October's $600 million buyback authorization.

Let's place Cypress under the lens and see whether such a move is appropriate for investors.

Feasibility of the move
Cypress more than doubled its year-over-year earnings in the just-concluded quarter on the back of impressive sales of its different product lines. The company's TrueTouch touchscreen has been a hit among mobile and tablet customers. Also, Cypress' emerging-technology division hit the $10 million revenue mark, helped by its Optical Navigation Sensors unit, and these factors propelled the company toward fatter profits.

The company's compounded annual revenue growth has been in the red over the past five years, but it has managed to post an 18% jump in revenues over the last year. Cypress has been doing well on its product-development front and has seen Samsung and Fujitsu choose its technology for various projects. Moreover, Cypress has entered into a partnership with NVIDIA (NAS: NVDA) to develop touchscreen capabilities for Android-based devices. With the business doing well, it seems like a reasonable time to buy back shares.

Money in the bank
Cypress is well placed to afford the buyback. It generated free cash flow of $213 million in the past 12 months, up from $143 million a year ago. The company also has $359 million in cash and short-term investments. The most impressive part is that the balance sheet doesn't sport any debt. So there shouldn't be any problem if the company wishes to raise money for the buyback in case its own coffers fall short.

So having seen that Cypress has both the cash to spend and a healthy business, let's take a look at how the stock is valued compared with its peers.

Source: Capital IQ, a division of Standard & Poor's.

Cypress is the costliest of the lot when we consider the P/E multiple. However, it is expected to grow its earnings considerably over the next year, which is reflected in the forward P/E.

The company has made some remarkable moves on the product-development front with its design wins, and the buyback will provide a further boost to the share price. Considering that Cypress is developing touchscreen capabilities for Android-enabled devices -- which sell like hotcakes -- the company has earnings-growth potential. (Analysts project long-term annual earnings growth at 13%.)

The Foolish takeaway
It seems good times are ahead for Cypress stockholders as the company looks set to expand, and the buyback could further enhance the stock's value. If you'd like to find out more about Cypress, add it to My Watchlist.

At the time thisarticle was published Fool contributor Harsh Chauhan owns none of the stocks mentioned in the article. The Motley Fool owns shares of Google.Motley Fool newsletter serviceshave recommended buying shares of NVIDIA and Cypress Semiconductor, writing puts on NVIDIA, and writing covered calls on Synaptics. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.