Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Synopsys Inc (SNPS) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Synopsys, Inc. provides software, intellectual property (IP) and services. The Company supplies the electronic design automation (EDA) software that engineers use to design and test integrated circuits, also known as chips. It also offers IP products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. It provides software and hardware used to develop the electronic systems that incorporate chips and the software that runs on them. It provides technical services to support its solutions and help its customers develop chips and electronic systems. It is also a provider of software tools that developers use to develop software code in a range of industries, including electronics, financial services, energy, and industrials. It offers products and services in four categories: core EDA; IP, Systems and Software Integrity; Manufacturing Solutions, and Professional Services and Other.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of SNPS – February 2017
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass 6 out of the following 7 tests. | ||||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | $9,850,853,481 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.00 | Fail | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Pass | ||
| 4. Dividend Record | Dividend Payments for 10 years prior | Fail | ||
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | 59.00% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 30.36 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 3.14 | Fail | |
| Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor. | ||||
| 1. Sufficiently Strong Financial Condition | Current Ratio > 1.5 | 1.00 | Fail | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 0.00 | Pass | |
| 3. Earnings Stability | Positive EPS for 5 years prior | Pass | ||
| 4. Dividend Record | Currently Pays Dividend | Fail | ||
| 5. Earnings Growth | EPSmg greater than 5 years ago | Pass | ||
Stage 2: Determination of Intrinsic Value
| EPSmg | $2.14 |
| MG Growth Estimate | 7.46% |
| MG Value | $50.06 |
| Opinion | Overvalued |
| MG Grade | D |
| MG Value based on 3% Growth | $31.00 |
| MG Value based on 0% Growth | $18.17 |
| Market Implied Growth Rate | 10.93% |
| Current Price | $64.90 |
| % of Intrinsic Value | 129.64% |
Synopsys, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the low current ratio, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.43 in 2013 to an estimated $2.14 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 10.93% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Synopsys, Inc. revealed the company was trading above its Graham Number of $38.97. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 30.36, which was below the industry average of 38.63, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-2.12.
Synopsys, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$2.12 |
| Graham Number | $38.97 |
| PEmg | 30.36 |
| Current Ratio | 1.00 |
| PB Ratio | 3.14 |
| Current Dividend | $0.00 |
| Dividend Yield | 0.00% |
| Number of Consecutive Years of Dividend Growth | 0 |
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Most Recent Balance Sheet Figures
| Balance Sheet Information | 10/1/2016 |
| Total Current Assets | $1,716,938,000 |
| Total Current Liabilities | $1,714,946,000 |
| Long-Term Debt | $0 |
| Total Assets | $5,240,365,000 |
| Intangible Assets | $2,784,906,000 |
| Total Liabilities | $2,045,219,000 |
| Shares Outstanding (Diluted Average) | 154,721,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $3.20 |
| Oct2016 | $1.73 |
| Oct2015 | $1.43 |
| Oct2014 | $1.64 |
| Oct2013 | $1.58 |
| Oct2012 | $1.21 |
| Oct2011 | $1.47 |
| Oct2010 | $1.56 |
| Oct2009 | $1.15 |
| Oct2008 | $1.29 |
| Oct2007 | $0.87 |
| Oct2006 | $0.17 |
| Oct2005 | -$0.12 |
| Oct2004 | $0.47 |
| Oct2003 | $0.91 |
| Oct2002 | -$1.51 |
| Oct2001 | $0.44 |
| Oct2000 | $0.69 |
| Sep1999 | $1.10 |
| Sep1998 | $0.65 |
| Sep1997 | $0.63 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $2.14 |
| Oct2016 | $1.58 |
| Oct2015 | $1.49 |
| Oct2014 | $1.51 |
| Oct2013 | $1.43 |
| Oct2012 | $1.35 |
| Oct2011 | $1.37 |
| Oct2010 | $1.21 |
| Oct2009 | $0.92 |
| Oct2008 | $0.71 |
| Oct2007 | $0.43 |
| Oct2006 | $0.14 |
| Oct2005 | $0.10 |
| Oct2004 | $0.20 |
| Oct2003 | $0.15 |
| Oct2002 | -$0.06 |
| Oct2001 | $0.68 |
Recommended Reading:
Other ModernGraham posts about the company
None. This is the first time ModernGraham has covered the company.
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Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.
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