How interested would you be in a technology growth company making touch sensor "hover" technology for Samsung phones and dozens of other devices that is trading under 15X next year's estimates? The stock is down over 15% since an early June report that the Korean handset maker was seeing a slowdown in sales of its Galaxy S4 unit. But that's not the whole story.
Synaptics (SYNA - Free Report) is a leading developer of human interface solutions for a wide variety of mobile computing and communications devices and is the leading supplier of TouchPads to the notebook computer market.
Products include the TouchPad input device, TouchStyk pointing stick, Dual Pointing combination input solution, ClearPad touch screen, Spiral pen input solution, and QuickStroke Chinese handwriting software.
Here's how much SYNA shares have been impacted by the Samsung concerns...
Putting the Galaxy S4 in Perspective
Investors need to consider several things when evaluating Synaptics as a buy or a sell. First, Samsung accounts for an estimated 20-30% of overall sales for the company and the Galaxy S4 program, specifically, is only 10% of that.
Second, what is the true extent of the S4 slowdown? The biggest concern was slowing sales to Europe. But from all the analyst reports I've read, it looks like those fears were overblown. The worst downgrade to sale estimates came from the analysts at Needham last week when they lowered their forecast from 100 million units to 80 million for 2013.
"At an estimated average selling price (ASP) for the touch controller of $1.10, the overall impact to revenue is around $30MM in CY13 or $0.30-$0.35 EPS impact."
While Needham analysts recently lowered their revenue and earnings estimates and their price target from $58 to $54, they reiterated their "Buy" rating as they felt that the market was giving the company little credit for winning the design placement in the S4, which was only confirmed in late April when the shares were trading $42.
"We believe SYNA has several design programs in the (second-half of) 2013, both on the tablet and handset side, that could provide upside to our reduced numbers, namely: Samsung Note III, Amazon Kindle tablets, Samsung lower end S4 variations (i.e. S4 Active and Mini) and higher sell-through on existing smartphone platforms."
Meanwhile, JPMorgan analysts have remained consistently positive on SYNA and recently raised their revenue and earnings estimates, their rating (Over-Weight), and price target for the shares, from $44 to $52. They note the design wins beyond Samsung with HTC, Blackberry, Sony, Lenovo, and LG.
As SYNA has invented better high-tech solutions for its PC and mobile OEM customers, profit margins have been in a strong up trend. From March of 2011 to March of this year, gross quarterly profit margin has grown from 40.46% to 49.65%.
And here's how analyst estimates stack up going forward for this $1.2 billion innovator of in-demand capacitive touch technology...
A Bad-Apple Taste?
Investors are probably more cautious than ever these days when it comes to much-hyped mobile device companies and their stocks. I will never forget what I learned from famed short-seller Doug Kass about investing in Apple last fall.
In late October, when AAPL shares were still trading above $600, Kass said "Never buy a tech stock with declining margins that is also over-owned."
Clearly, he had learned his lesson with similar stories in MSFT, INTC, and CSCO in the last decade.
Thankfully, my holding of SYNA shares doesn't qualify on either count, neither being "over-owned" (at barely mid-cap status) and maintaining healthy margin growth as it expands its product and customer bases with next-generation technology.
Unless something changes with the earnings estimate story that takes away its strong Zacks Rank, I would look to add anywhere near the 200-day moving average.
Kevin Cook is a Senior Stock Strategist with Zacks.com