Company Profile (excerpt from Reuters): Cadence Design Systems, Inc., incorporated on April 8, 1987, provides solutions that enable its customers to design electronic products. The Company’s product categories include Functional Verification, Digital integrated circuits (IC) Design and Signoff, Custom IC Design and Verification, System Interconnect and Analysis, and intellectual property (IP). The Company’s functional verification products are used to verify that the circuitry or the software designed will perform as intended. Its digital IC design offerings are used to create representations of a digital circuit or an IC that can be verified for correctness prior to implementation. Its custom IC design and verification offerings are used to create schematic and physical representations of circuits down to the transistor level for analog, mixed-signal, custom digital, memory and radio frequency (RF) designs. Its system interconnect and analysis offerings are used to develop printed circuit boards (PCBs) and IC packages. Its design IP offerings consist of functional blocks, which customers integrate into their ICs for the development process. Its product offerings include electronic design automation software, emulation and prototyping hardware, system interconnect and analysis.
Downloadable PDF version of this valuation:
ModernGraham Valuation of CDNS – April 2018
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 | $10,414,580,128 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.53 | Fail | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Fail | ||
| 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 | 1652.94% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 36.99 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 10.49 | 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 | 1.53 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 1.91 | Fail | |
| 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 | $0.99 |
| MG Growth Estimate | 6.16% |
| MG Value | $20.69 |
| Opinion | Overvalued |
| MG Grade | D |
| MG Value based on 3% Growth | $14.41 |
| MG Value based on 0% Growth | $8.45 |
| Market Implied Growth Rate | 14.25% |
| Current Price | $36.77 |
| % of Intrinsic Value | 177.69% |
Cadence Design Systems 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, insufficient earnings stability over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, 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 $0.7 in 2014 to an estimated $0.99 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 14.25% 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 Cadence Design Systems Inc revealed the company was trading above its Graham Number of $11.06. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 36.99, which was below the industry average of 49.59, 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 $-1.59.
Cadence Design Systems 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) | -$1.59 |
| Graham Number | $11.06 |
| PEmg | 36.99 |
| Current Ratio | 1.53 |
| PB Ratio | 10.49 |
| 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 | 12/1/2017 |
| Total Current Assets | $979,988,000 |
| Total Current Liabilities | $642,398,000 |
| Long-Term Debt | $644,369,000 |
| Total Assets | $2,418,714,000 |
| Intangible Assets | $944,844,000 |
| Total Liabilities | $1,429,512,000 |
| Shares Outstanding (Diluted Average) | 282,222,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $1.55 |
| Dec2017 | $0.73 |
| Dec2016 | $0.70 |
| Dec2015 | $0.81 |
| Dec2014 | $0.52 |
| Dec2013 | $0.56 |
| Dec2012 | $1.57 |
| Dec2011 | $0.27 |
| Dec2010 | $0.48 |
| Dec2009 | -$0.58 |
| Dec2008 | -$7.30 |
| Dec2007 | $1.01 |
| Dec2006 | $0.46 |
| Dec2005 | $0.16 |
| Dec2004 | $0.25 |
| Dec2003 | -$0.07 |
| Dec2002 | $0.23 |
| Dec2001 | $0.55 |
| Dec2000 | $0.19 |
| Dec1999 | -$0.06 |
| Dec1998 | $0.10 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $0.99 |
| Dec2017 | $0.70 |
| Dec2016 | $0.73 |
| Dec2015 | $0.75 |
| Dec2014 | $0.70 |
| Dec2013 | $0.68 |
| Dec2012 | $0.13 |
| Dec2011 | -$0.80 |
| Dec2010 | -$1.29 |
| Dec2009 | -$1.87 |
| Dec2008 | -$2.03 |
| Dec2007 | $0.52 |
| Dec2006 | $0.25 |
| Dec2005 | $0.17 |
| Dec2004 | $0.20 |
| Dec2003 | $0.17 |
| Dec2002 | $0.26 |
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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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