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

Cadence Design Systems Inc (NASDAQ: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.

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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