Cypress Semiconductor Downgraded By Morgan Stanley After Gaining 36% Over 3 Months

Cypress Semiconductor Corporation CY shares have surged over the past three months, boosted by a solid earnings report, pending CEO change and M&A-related speculations, Morgan Stanley’s Craig Hettenbach said in a report. He downgraded the rating on the company from Overweight to Equal-weight, while maintaining the price target at $11.

Cypress Semiconductor’s stock is currently trading at a 15-20 percent discount to peers, versus 35 percent three months ago, analyst Craig Hettenbach noted. He added that the discounted valuation is warranted, given Cypress Semiconductor’s lower margins and weaker balance sheet. Following the sharp upturn, the risk/reward appears more balanced.

Drivers And Risks For The Stock

Hettenbach mentioned the upside drivers for the stock as:

• Cypress Semiconductor delivering an earnings beat when it reports results on July 28.
• The company naming a strong CEO – “an external hire with credibility in the investment community.”
• Optionality in subsidiary Deca Technologies – An implied valuation of $300mn following the ASE investment, representing 8.5 percent of Cypress Semiconductor’s market cap for merely 1 percent of sales

The analyst enumerated the downside risks for the stock as:

• Investors questioning recovery in case gross margins do not beat expectations
• The board choosing an internal candidate for CEO
• Resurfacing of macro concerns, which exerts greater pressure on Cypress Semiconductor’s shares since the balance sheet is weaker

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