Tell me again that the market is "rational." That it takes into account news good, bad, and indifferent, weighs the facts, projects the likelihood of future possibilities, and prices securities in some reasonable relation thereto. Because when I look at Synopsys (Nasdaq: SNPS), I just don't see it.
Synopsys, which supplies semiconductor design software to a range of chipmakers -- AMD (NYSE: AMD) and Intel (Nasdaq: INTC), NVIDIA (Nasdaq: NVDA), Cypress (NYSE: CY), and Infineon (NYSE: IFX) -- posted its ninth consecutive quarter of estimates-busting earnings yesterday.
Yet unless I'm going blind, the stock price today sits within 3% of where it sat way back in February 2006, when Synopsys began its winning streak. For a company that's grown its profits year over year in every quarter for the past two years, and beaten expectations by an average of 14% per quarter, that share-price appreciation seems a mite stingy.
But enough of my rant
OK. I'm done ranting now. Instead of complaining over the unfairness of it all, perhaps investors should look on Synopsys's perpetual price weakness as an opportunity to buy into the stock today. Let's see if that would be a good idea.
Synopsys reported 5% growth in fiscal first-quarter revenue yesterday. Gross margins eked out a 10-basis-point gain to 80.6%. However, across-the-board cuts in operating costs sent Synopsys's operating margin flying. Sitting at 6.6% one year ago, it leapt to 17% in fiscal Q1 2008. Result: GAAP profits nearly doubled to $0.31 per share.
Synopsys's latest profit margin approaches that routinely posted by rival Cadence (Nasdaq: CDNS). But can Synopsys maintain it? My guess is "no," and, for what it's worth, management seems to agree. Laying out its full-year guidance yesterday, Synopsys predicted:
- A little more than $1.3 billion in revenue
- $1.03 to $1.12 per share in profit
- I estimate an operating margin of about 12.2%
- The usual "greater than $325 million" in cash from operations
Foolish takeaway
All of the above is good to know. But what you really want to know is whether Synopsys is cheap enough to buy, right? Well, at first glance, the company's 27 trailing P/E doesn't look attractive, and the 22 current P/E that management's EPS projection suggests isn't much prettier.
That said, if Synopsys spends its usual $45 million or so in capex this year, then based on the cash flow projection, this company appears to be selling for a price-to-free cash flow ratio of about 12. To me, that still looks cheap.
Our synopses of Synopsys's last quarters:
