Stock to Watch: CSR

The FTSE 250-listed shares in CSR have been on my radar for years, but I've never invested due to the nature of the beast: a microchip company previously trading on a big price-earnings multiple. It can be hard to judge trends in a complex dynamic industry, and if anything does go awry relative to a fat P/E then you may be 20% down pretty soon.

Yet this can offer value such that, if the right kind of news follows in time, you enjoy a re-rating. It's a classic example of what's called in financial jargon, a "high beta" share, prone to be more volatile than the market. Get your timing reasonably right and you have a winner.

CSR is currently interesting due to such a divergence between its share price and underlying prospects. It de-rated from a 400p to 500p range earlier in 2010, as low as 280p at the start of last September, and despite a rebound to 360p has settled back at about 320p - so not really joining this year's fourth-quarter rally.

The reason appears to be a belief that CSR has insufficient exposure to the smartphone market which limits the handset side of this wireless chip technology group. Growth here may be subdued while CSR's existing technology is excluded from products such as Apple's iPhone; and a key project is only being launched in the third quarter of 2011.

So perception wise, there is a bit of a pause in CSR's momentum currently, with the long-term success of its handset business linked to progress with 40 new nanometre chips.

This makes the story interesting to follow, relative to a modest valuation, although CSR could also show useful near-term progress with a Global Positioning System (GPS) chip now in mass production.

Furthermore, the company has just launched a Bluetooth design for mobile computing devices enabling high-speed data transfer and Bluetooth power efficiency. Automotive is CSR's fastest growing business, enjoying a 70% market share with 16 major car manufacturers.

Despite a third-quarter lag due to issues with a partner, this side is expected to grow revenue at over 27% annually to 2014. So CSR has (in part) vigorous legs, even if its overall corporate body is a bit hard to predict overall.

Company REFS shows varied forecasts, about £32 million to £53 million pre-tax profit for 2010 and £38 million to £63 million in 2011, equating to an average earnings per share figure of about 24p or so. With the shares at about 350p, this initially implies a prospective P/E multiple in the mid teens relative to 10 at the trough of the bear market and near 30 in 2006.

Bear in mind though, CSR has about £300 million cash (or near equivalents) in context of a market capitalisation of about £620 million, so you could adjust the P/E multiple down to reflect the business.

As typifies international technology companies, CSR reports in US dollars, although I have given the forecasts in sterling for UK context. Over three quarters of revenue go to Asia, supplying those technology majors, also continental Europe and then North America.

If you look at CSR's recent announcements (from September), they largely involve share buybacks, another hint of value. While some investors may see buybacks by a technology company as implying it is short of exciting opportunities, the $50 million designated is a snip in context of $460 million cash and likely a sensible move. Perhaps the share price has not responded much because a cynical market is prone to view buybacks (as opposed to dividends) possibly as helping boost directors' bonuses when they are linked to earnings per share.

Despite healthy cash generation, CSR has to date lacked a dividend and payouts anticipated for 2010/11 imply a notional yield of just 1.7%. However, the board promises a "progressive" dividend policy, so payouts should rise.

Revenue growth near 9% for 2011 and 11% for 2012 is projected by analysts, likely with some guidance from management, and if this is at all realistic then CSR will attract more attention as a "recovery to growth" play. The problem for perception has been profit wiped out over 2008-09 as turnover also fell in 2009, a natural response to lower demand amid the financial crisis if suggesting an aspect of operational gearing too.

So CSR has been demoted from the ranks of growth shares to cyclicals; disappointingly if you have been a holder, yet usefully if you are able to follow developments and consider switching in.

Regarding the balance sheet, goodwill represents nearly three quarters of the $301 million fixed assets, although the extent of cash and near-equivalents make it less than a quarter of total assets. There is no debt to constrain either the balance sheet or the income statement with charges, and CSR is well positioned to finance its own development.

So this share is at an interesting stage: relatively overlooked due to issues in the recent past upsetting expectations; yet well placed both with useful products coming through, and financially well endowed with substantial cash.

It all implies a useful risk/reward profile with limited downside, especially with the buyback programme underway, and a modest price-earnings rating if the group can prove a return to growth. This involves an aspect of speculation, with awareness of the twists in fortune any technology firm must endure; but there looks to be plenty of potential as new devices kick in with demand for Bluetooth, Wi-Fi and GPS.

If CSR can re-affirm solid growth, then there is takeover potential to be aware of, given the challenge for cash-rich US giants especially to boost their numbers.

For more information see www.csr.com.