Software Stocks

Cadence Design Systems Inc Valuation – January 2019 $CDNS

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 – January 2019

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 $13,545,636,946 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.64 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 1535.29% Pass
6. Moderate PEmg Ratio PEmg < 20 51.86 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 10.77 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 1.64 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.99 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 $0.93
MG Growth Estimate 4.74%
MG Value $16.67
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $13.45
MG Value based on 0% Growth $7.88
Market Implied Growth Rate 21.68%
Current Price $48.09
% of Intrinsic Value 288.43%

Cadence Design Systems Inc is suitable for the Enterprising Investor but not 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 is only concerned with the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.7 in 2014 to an estimated $0.93 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 21.68% 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 $10.32. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 51.86, which was above the industry average of 50.37. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-0.45.

Cadence Design Systems Inc receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$0.45
Graham Number $10.32
PEmg 51.86
Current Ratio 1.64
PB Ratio 10.77
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 9/1/2018
Total Current Assets $888,381,000
Total Current Liabilities $541,321,000
Long-Term Debt $345,113,000
Total Assets $2,273,207,000
Intangible Assets $899,726,000
Total Liabilities $1,015,790,000
Shares Outstanding (Diluted Average) 281,646,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.35
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 $0.93
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

Recommended Reading:

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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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