A Chipmaker Support Company with Strong Fundamentals: Cadence Design Systems Inc (CDNS)

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Let’s take a look at some peer earnings. Synopsis Ltd. (TLV:SYNO), which competes in the EDA division, has been growing earnings impressively over the last few years, although they missed estimates by two cents in Q2 2012. On the other hand, they beat by over 20% for Q1 2013. The expected growth rate isn’t too hot, though, at 5.5%, and as I will discuss in the next paragraph, the stock is a little pricey. Another competitor, Mentor Graphics Corp (NASDAQ:MENT), has seen earnings recover to pre-crisis levels in 2012, and is growing fast. The company has a strong history of beating expectations and is looking at a 3-5 year expected growth rate of over 20%, higher than Cadence’s 16.3%.

Valuations and Metrics

At the moment, Cadence Design Systems Inc (NASDAQ:CDNS) is trading at a discount to the sector and its major competitors. Its TTM P/E 8.87x is significantly lower than Mentor’s 14.9x and Synopsys’ 27.65x, as well as the industry average of 15.46x. The company’s PEG ratio is only 0.91, but the price to sales is about double the industry average at 2.99. The TTM return on equity is excellent at 66.34% and the TTM operating margin of 15.3% is on par with the industry. The company has a fairly healthy balance sheet with a total debt to equity ratio under 50, and around $827 million in cash on the books.

Bottom Line

In summary, Cadence Design Systems Inc (NASDAQ:CDNS) looks pretty solid from a fundamental perspective. Earnings, after dipping badly during the crisis, are recovering, and the company is aggressively increasing revenue. Despite a troubling outlook for the semiconductor industry, the company’s support services are still seeing strong demand. Furthermore, the stock is valued at a discount to its peers and the industry, and has enough cash on the books to fund further acquisitions should they prove necessary.

The article A Chipmaker Support Company with Strong Fundamentals originally appeared on Fool.com and is written by Daniel James.

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