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# Cypress Semiconductor Corporation Message Board

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• floppy_6 floppy_6 Feb 24, 2007 5:04 AM Flag

## Sum of Parts = \$25.50 per Share

Simon,

Long time, thank you for the great analysis. So, you are sure that it will be a forced conversion?

I am still holder on CY. Just this moment, I find it confusing to calculate the residual core CY value. The formula I use to caluculate CY core share value =

1) First get EV (enterprise Value) = Capitalization - net cash (Net cash = current asset - total debt, some people use cash instead of current asset, I believe "inventory" still valuable).
2) deduct the holding value on SPWR.
3) Then divide by share count to get core CY per share value.

The result I get after conversion is \$2.25 per share CY implied core value. This is absured, can't be that low. I didn't update my spreadsheet for a long time, this morning I used the old formula, still comes out \$5.2. There seems some major change on CY balance sheet. Where that almost \$250 millions lift on Cash came from (between 12/06 and 1/06)? Does it come from the consolidation of SPWR statement? And when I deduct SPWR holding value in above step 2, should I also deduct SPWR's cash out of CY's B/S?

I Guess I am asking a very confusing question. Anyway, either \$2.25 or \$5.2, it is way too low for what core CY worth. I am holding for the core CY value for the following two reasons:

1) Psoc and Proc: Because of the divesture of PC clock, last Q's ER a bit confusing, PSOC and PROC should still be solidly growing.

2) There are two new products in DCD division - Westbridge and antioch could contribute \$5-10 mils a quarter by year-end.

Since bond convertible holders had long shorted this stock, we won't anticipate selling pressure after conversion, right?

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• If I add a step 2-1: adding back CY portion of SPWR's net cash.

1) Net cash of SPWR = 270 mils.
2) CY's portion = 52/81 = 64.2%
3) CY's portion of SPWR net cash = 173.5 mils.

Then core CY value (net of any net cash) = \$3.23 per share, still quite low compared with my old formula. Anyway, this is striped out of the cash value.

• Last Quarter revenue - CCD 79.9 mils, DCD 27.9 mils, MID 91.7 mils.

Total revenue excluding SPWR = 200 mils.
Total revenue excluding SPWR & MID = 108 mils.

EV = 3.23 x 175.5 = 566.8 mils

EV/S = 0.7 (quarter revenue x 4)
EV/S (excludes MID) = 1.31, if we consider MID worthless.

NSM's EV/S > 4, commodity stocks like VSH and MU all carries EV/S about 1.2 to 1.3.

• Balance sheet. Ignore any SPWR since 12/31. Start from 12/31 B/S

CY 12/31 = \$642M
SPWR 12/31 = \$165M

Balance: \$477M
Sale of asset \$53M
Total \$530M

Bond redemption = \$180M
Balance after 2/23: \$350M and no debt.

Based on incentives of players, conversion of debt with \$180M payment by CY is a forgone conclusion.

On capitalized value - It is a fallacy to use the figure based on outstanding shares; one should really use fully diluted. Multiply the stock price by fully diluted shares to get the real market cap. Based on the prevailing definition, on paper, the conversion of CY debt - which had been anticipated by the market - will suddently change due to the conversion. With only a small change - either up or down - of the price of the stock. By contrast, the fully diluted market cap did not significantly change yesterday - nor should it without a signicant change in the value of a share of CY stock.

On valuation. If we're talking market valuation of core CY, use the calculation I gave yesterday - except that it's actually a little higher if you use the fully diluted figure of \$180M shares.

If you want to estimate intrinsic value of CORE CY (on a sum of the parts basis), then the market cap of CY is irrelevant except as a point of comparison.

One should not mix the two calculations. Even the calculation I gave yesterday is subject to this criticism because it takes the market valuation of SPWR at face value, as a given: In effect, I used a market valuation for SPWR and a crude intrinsic value calculation for CY. But intrinsic value of CORE CY, in any case, should be based on characteristics of the CY business. The stock price is only relevant to the business insofar as it affects CY access to capital or potential changes in CY ownership.

The time-honored, theoretically correct, measure of intrinsic value involves current balance sheet and discounted cash flows. But I have never attempted such a calculation for CY.

There is a web site that does such calculations automatically (www.valuepro.net), based on recent history. Its fairly large set of parameters that are defaulted based on history, but can be modified interactively to test the impact of each assumption or to make better, forward-looking, assumptions. Being backward looking, the default parameters generated very high numbers for CY in 2000 but, for quite a number of years have given CY a value of 0.

TJ wrote a piece many years ago recommending P/S as a much more stable yardstick for measuring CY - as cheap or expensive, based on simulation of various trading strategies over the history of CY. I've always thought it made a lot of sense.

I have wondered if TJ became a captive of his own insight - trying to grow at any price without adequate regard for the profitability of that growth. Certainly the explicity strategy dating back to 1998 had been to grow, though it has also been to move away from commodity chips. Examples of MRAM and NSE come to mind, but the retrospective look is not exactly fair unless one also takes into account brilliant successes as SPWR (an entrepreneurial triumph) and PSOC (an internal development triumph). In any case, the old strategy died 18 months ago and the shift has transformed CY. CY is now positioned for profitable growth with far less volatility to its revenue and, especially, to its profitability. The old P/S benchmarks can still tell you when CY is cheap; it's not so clear that the old benchmarks will tell you when to sell.

Regards,
Simple Simon

• 2 Replies to simple_simon_sez
• Simon,

I did use fully diluted shares 175.5 mils to obtain EV. Except EV itself not very meaningful since it excludes the cash out, EV/S is more useful in finding the relative valuation.

EV/S is basically similar to P/S except cash being taken out for comparing against another stock since cash effect between a leveraged firm or de-leveraged firm can distort the comparison when P/S is being compared between stocks.

Anyway, TJ's P/S approach seems somewhat an excuse to inability to translate revenue to bottom line. In PSOC, there might be some good excuse since they are dealing with thousands small customers some requires tool education, hopefully when PSOC is more mature, Opex will be reduced. But overall CCD division should not have good excuse for failing to leverage for a long time. I find this market much more returning to P/E measure especially on tech stocks. P/E shows the company's real strength, P/S more or less somewhat excuses.

I didn't come here for sometime. Once I wrote here - SPWR uses more expensive MonoCrystalline to obtain the highest conversion efficiency. That somewhat spooks me. Admittedly, I did not do as thorough research as 6 months ago. But SPWR seems to carry lower gross margin that peers - STP, Q-CELL and FSLR. The newly acquired partner provides some good excuse, but I believe this quarter only includes very little part of new partner. Manufacturing lines set-up may provide another excuse, but I am not sure. Anyway, while ESLR is aiming 3 gram low usage, FSLR boasting to have 37% gross margin, I kinda have suspecious mind on SPWR's leadership when total shares aren't entirely out yet.

I sold most shares on the last run, re-enter at lower price but less amount now. Why am I here? I am still somewhat believer on P/S.

Regards,

Floppy

• Thanks for a good analysis, Simple Simon. I always liked TJ's old P/S metric and used it successfully to buy/sell CY. Cheers, Sully

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