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

With chipmakers usually in the tech sector spotlight, it’s easy to ignore the companies that provide support for this industry. Yet the companies that provide software for designing complex integrated circuits are an important part of the production process. One company that provides software and hardware support for electronics companies is growing earnings at a steady clip, and furthermore appears quite undervalued at the moment. Cadence Design Systems Inc (CDNS) looks like a pretty good bet right now.

Company Overview

Cadence Design Systems Inc (NASDAQ:CDNS) provides electronic design automation (EDA), software solutions, hardware and silicon intellectual property. Additionally, the company offers engineering and education services. Its products are used in the development of complex integrated circuits and electronic systems. The stock has a market cap of nearly 4 billion dollars and is up around 12% in the last year. With a beta of 1.38, it isn’t too volatile. Cadence recently announced the acquisition of Tensilica, a leading dataplane processing IP provider, for some $380 million. However, investors weren’t too pleased with the hefty premium paid for the acquisition, sending shares down 5%.

Earnings and Growth

After some pretty big earnings in 2006 and 2007, the company was hit by the financial crisis, reporting a loss in both 2008 and 2009., Since then the company has been working hard on turning around operations and is once again growing earnings, although annual EPS hasn’t yet reached the pre-crisis levels. Still, the company is on the right track. Quarterly earnings reports have beaten analyst expectations every single quarter since Q1 2009, with 2010 EPS of $0.20 almost quadrupling to $0.77 in 2012. Analysts expect earnings of $0.89 per share in fiscal 2013.

In the latest report, Q4 2012, the company delivered fairly strong full-year results. Revenue for the year was up 15% to $1.326 billion, and the operating margin increased by 5% to 23%. Management warned of soft conditions in the global semiconductor market, but maintained that the company benefited from customers’ continuing investment in new designs and the increasing complexity of these designs. Looking ahead to Q1 2013, the company is expecting revenues in the range of 342-352 million dollars, and non-GAAP EPS of $0.19-$0.20.