Software Stocks

Synopsys Inc Valuation – February 2019 $SNPS

Company Profile (excerpt from Reuters): Synopsys, Inc., incorporated on May 7, 1987, 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 (ICs), also known as chips. The Company also offers IP products, which are pre-designed circuits that engineers use as components of larger chip designs rather than designing those circuits themselves. The Company provides software and hardware used to develop the electronic systems that incorporate chips and the software that runs on them. The Company provides technical services to support its solutions and help its customers develop chips and electronic systems. The Company 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. The Company offers products and services in four categories: core EDA; IP, Systems and Software Integrity; Manufacturing Solutions, and Professional Services and Other.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of SNPS – February 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 $14,801,985,000 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.73 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 86.56% Pass
6. Moderate PEmg Ratio PEmg < 20 37.26 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.38 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 0.73 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -0.22 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 $2.66
MG Growth Estimate 11.76%
MG Value $85.11
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $38.53
MG Value based on 0% Growth $22.59
Market Implied Growth Rate 14.38%
Current Price $99.01
% of Intrinsic Value 116.34%

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 level of debt relative to the 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 $1.49 in 2015 to an estimated $2.66 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 14.38% 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 $46.99. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 37.26, which was below the industry average of 56.55, 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 $-7.24.

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) -$7.24
Graham Number $46.99
PEmg 37.26
Current Ratio 0.73
PB Ratio 4.38
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 10/1/2018
Total Current Assets $1,543,797,000
Total Current Liabilities $2,102,415,000
Long-Term Debt $125,535,000
Total Assets $6,145,974,000
Intangible Assets $3,503,653,000
Total Liabilities $2,660,959,000
Shares Outstanding (Diluted Average) 154,218,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $4.21
Oct2018 $2.82
Oct2017 $0.88
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.66
Oct2018 $1.82
Oct2017 $1.36
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

Recommended Reading:

Other ModernGraham posts about the company

Synopsys Inc Valuation – April 2018 $SNPS
Synopsys Inc Valuation – Initial Coverage $SNPS

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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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