For Immediate Release
Chicago, IL – June 15, 2022 – Zacks Equity Research shares
Cadence Design Systems ( as the Bull of the Day and Teradata Corporation ( CDNS Quick Quote CDNS - Free Report) TDC Quick Quote TDC - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on M&T Bank Corp. ( MTB Quick Quote MTB - Free Report) , First Republic Bank ( FRC Quick Quote FRC - Free Report) and SVB Financial Group ( SIVB Quick Quote SIVB - Free Report) .
Here is a synopsis of all five stocks:
Cadence Design Systemsis the $40 billion provider of Electronic Design Automation (EDA) and System Design Enablement (SDE) software tools for semiconductor manufacturers. Cadence calls their unique brand and strategy of platform capabilities Intelligent System Design.
In fact, NVIDIA is a Cadence customer precisely because Jensen Huang and his teams of engineers are highly focused on simulating all facets of their chip design and testing.
Through its Intelligent System Design strategy, the company offers software, hardware, services and reusable IC (integrated circuit) design blocks to electronic systems and semiconductor customers.
Cadence's core EDA software and services enable engineers to develop different types of ICs. Its design IPs are directly integrated into the ICs.
Here's what I wrote in May when I was recommending CDNS shares near $130 and they rallied to $164 before the current tech rout...
Nexus of Software and Industrial Design
The software to design semiconductors has become ever more important for at least 3 reasons...
First, transistor architecture has slipped to sub-microscopic levels under 10 nanometers, smaller than the coronavirus.
Second, the proliferation of applications in autos, mobile, home, factory, and datacenter are accelerating demand and custom solutions for OEMs.
Third, the engineering, testing and simulation of these ultra-miniature designs are critical before they are shipped to a chip foundry, or "fab."
(end of notes from May)
This Zacks #1 Rank is not cheap trading over 11X sales -- just like NVIDIA -- but after a solid beat-and-raise Q1 reported in late April, several analyst price targets moved above $200. We'll look at the analyst moves and commentary after we go over some of the report details.
Another Beat-and-Raise Quarter
Cadence posted non-GAAP earnings of $1.17 per share in Q1 2022, which topped the Zacks Consensus Estimate by 15.8% and increased 41% year over year.
Revenues of $902 million surpassed the Zacks Consensus Estimate by 5% and increased 23% on a year-over-year basis. The top line benefited from continued strength across all segments driven by higher demand for its products, also reflected in an order backlog of $5.1 billion.
Driven by strong first-quarter results, the company raised its outlook for 2022. Revenues for the full year are now projected in the range of $3.395-$3.435 billion compared with the earlier guidance of $3.32-$3.38 billion.
The Zacks Consensus Estimate for 2022 revenues moved up from $3.36 billion to $3.4B, which indicates annual growth of 13.8%.
Non-GAAP earnings for 2022 are expected in the range of $3.89-$3.97 per share compared with the earlier guidance of $3.70-$3.80 per share. The Zacks Consensus Estimate for 2022 earnings subsequently jumped from $3.73 per share to EPS of $3.89, which suggests yearly growth of 18.25%.
In the first quarter, Product & Maintenance revenues (93.8% of total revenues) of $846 million were up 21% year over year. Services revenues (6.2%) of $56 million increased 51.4% from the year-ago quarter's figure.
Geographically, Americas, China, Other Asia, Europe, Middle East and Africa (EMEA) and Japan contributed 47%, 16%, 18%, 14% and 5%, respectively, to total revenues in the quarter under review.
Product-wise, Custom IC Design & Simulation, Digital IC Design & Signoff, Functional Verification, IP and Systems Design & Analysis contributed 22%, 27%, 28%, 13% and 10% to total revenues, respectively.
The company's digital and signoff business delivered 23% year-over-year growth in revenues. Digital Full Flow saw robust traction with 15 new customer wins. The company's Cadence Cerebrus solution witnessed accelerating momentum and was deployed by several customers.
Palladium and Protium (especially Z2 and X2) platforms witnessed continued momentum with many deal wins. The company noted that it won 10 new clients and 50 repeat orders in the first quarter which included more than half for both the platforms. Most of the deal wins came from clients in the hyperscale, AI/ML and networking domains.
In 2021, Cadence introduced 13 new products, including Cadence Helium Virtual and Hybrid Studio, Midas Safety platform and Allegro X.
Cadence's System Design & Analysis Business reported 22% year-over-year growth.
CDNS PT raised to $215 from $205 at KeyBanc: Analyst Jason Celino highlighted the Q1 $45 million revenue beat on broad-based strength and the 2022 revenue guide bump of $56M at the midpoint of $3.395B-$3.435B.
CDNS PT lowered to $203 from $211 at Baird: Analyst Joe Vruwink kept an Outperform rating on the shares and said he remains a buyer of the shares following its earnings report as all business groups saw strength with recurring revenues increasing 19% and upfront revenues increasing 49%. He raised the full-year outlook given 1Q strength, upside in 2Q, and favorable backlog development.
CDNS PT raised to $193 from $185 at Needham: Analyst Charles Shi noted that yet another beat-and-raise quarter proves that Cadence can accelerate growth and expand margins in spite of the macro headwinds -- inflation and semiconductor cycles -- that have been weighing on most software and chip stocks.
Shi also observes that his recent conversations with investors indicate growing interest in EDA stocks like Cadence Design, which is "increasingly seen as a potential hedge against a recession and the semiconductor cycle."
Top Stock Picks video, I highlighted why I think the comments from Shi are noteworthy and why I think you can buy CDNS shares now under $140 as they exhibit good relative strength vs the broader Semi sector.
Disclosure: I own NVDA and CDNS shares for the Zacks TAZR Trader portfolio.
Teradata Corporationis a leading provider of hybrid cloud analytics software. It has evolved from an enterprise database company to an enterprise analytics platform provider.
Teradata's analytics platform helps customers integrate and simplify their analytics ecosystem, access and manage data, and use analytics to extract answers and derive business value from data. The company's target market includes companies which are the world's most demanding, large-scale users of data.
TDC delivered a respectable quarter of top and bottom beats in its Q1 report in early May, but guidance was cloudy and thus analysts had to take estimates down significantly.
Teradata reported first-quarter 2022 non-GAAP earnings of 65 cents per share, which beat the Zacks Consensus Estimate by 1.6%. Further, the figure was within the company's guidance of 63-67 cents.
However, the bottom line decreased 5.8% year over year.
Revenues of $496 million increased 1% and 4% year over year on a reported and constant-currency (cc) basis, respectively.
Top-line growth was driven by increasing recurring and perpetual revenues. Further, the strong performance delivered by the company in the Americas region was a positive.
Total annual recurring revenues (ARR) at the first-quarter end increased 2% year over year (up 3% at cc) to $1.43 billion. Public cloud ARR surged 69% year over year on a reported basis and 70% at cc to $209 million.
We note that the company ceased its operations in Russia as a result of the ongoing Russia-Ukraine war.
For second-quarter 2022, non-GAAP earnings are expected between 26 cents per share and 30 cents. The Zacks Consensus Estimate was pegged at 52 cents before this report.
For 2022, non-GAAP earnings are expected between $1.55 per share and $1.65 (down from the aforementioned $1.82-$1.92). The Zacks Consensus Estimate for earnings sat at $1.92 per share, indicating a 16.7% decline.
Public cloud ARR is projected to increase 80% on a year-over-year basis.
Total ARR is expected to fall year over year in the low-single-digit range.
Teradata expects recurring revenues to decline in a low-single-digit to mid-single-digit range from 2021.
The company projects total revenues to fall year over year in the low to mid-single-digit range on a reported basis. Further, it is expected to grow in the low-single-digit range at CC from 2021.
The consensus mark for revenues was pegged at $1.93 billion before the guidance and is now $1.81 billion, representing a 5.4% annual decline.
Given this drop in estimates, it's best to wait until next quarter to see if TDC has better visibility on their growth. The Zacks Rank will let you know.
Additional content: Door's Open for 75bps Rate Hike: 3 Bank Picks
The U.S. economy continues to grapple with raging inflation levels. The latest Labor Department report shows that the Consumer Price Index jumped 8.6% year over year last month (the highest level since December 1981), surpassing the market expectations and April's number of 8.3%.
This bigger-than-expected jump in prices in May has opened the doors for a larger interest rate hike by the Federal Reserve at the end of the two-day policy meeting on Jun 15. Many market participants are contemplating that the central bank, which had earlier shown the intent to continue raising interest rates until inflation is tackled, in a surprise move, might hike the rates by 75 basis points (bps).
Per the CME FedWatch Tool data, there is a 96.3% chance that the Fed will raise the interest rates by 75 bps tomorrow, up from just 23.2% probability on Friday, when the new inflation numbers were out. Against this backdrop, it is advisable to invest in banks as they thrive in a higher interest rate environment. Hence, we have selected —
M&T Bank Corp., First Republic Bank and SVB Financial Group — as these will benefit from higher interest rates. Steps Taken So Far Not Enough
The efforts taken so far by the central bank haven't been enough to curtail inflation. The Fed was already behind the curve when it raised the interest rates for the first time since 2018 this March. Since then, it has been trying to catch up.
The Fed raised interest rates by 25 bps in March, followed by a 50 bps increase in May. At present, the short-term interest rates stand at 0.75-1.00%.
At the end of the May FOMC meeting, the Fed chairman Powell had stated that a 75-bps hike is "not something that the committee is actively considering" and hinted at the possibility of further hikes of 50 bps each in the next two meetings in June and July.
Powell and other officials now seem ready to take drastic steps to tackle red-hot inflation. At a Wall Street Journal event last month, Powell had said, "What we need to see is inflation coming down in a clear and convincing way and we're going to keep pushing until we see that. If we don't see that, we will have to consider moving more aggressively."
As the economic data point toward a grim picture, the Fed might move more aggressively to handle the out-of-control situation. The officials have stated that they would be guided by the evolving macroeconomic developments. They also are taking note of the growing supply-chain disturbances from the ongoing Russia-Ukraine war crisis and the resurging COVID-19 cases in China.
Bank Stocks to Bet On
The three shortlisted banks are not only expected to benefit from higher rates but also have robust fundamentals. Along with the rate hike expectations, a continued rise in the demand for loans, decent economic growth and business-diversification efforts will likely aid banks' top-line growth.
Banks, which have seen their margins shrinking since the start of the pandemic in mid-March 2020 due to the near-zero interest rates, are expected to witness improvement in net interest margins (NIM) and net interest income (NII) in the quarters ahead.
The shortlisted banks have a market capitalization of more than $25 billion and currently carry a Zacks Rank #2 (Buy) or better. You can see
. the complete list of today's Zacks #1 Rank (Strong Buy) stocks here
These banks are part of the S&P 500 Index, which entered the bear market yesterday on recessionary fears. Also, all three banks are expected to witness earnings growth for 2022 and 2023.
Supported by a solid balance sheet and liquidity position,
M&T Bank is expected to keep expanding through strategic acquisitions. The company has accomplished several major acquisitions in the last several years. In April 2022, MTB completed the acquisition of People's United for $8.3 billion and expects to realize cost savings of $330 million by early 2023, with the deal to be accretive to earnings.
The bank, which has a market cap of $29.8 billion, operates as a solid and sustainable regional bank franchise with a footprint that spans six Mid-Atlantic States and DC. This will likely allow M&T Bank to continue generating a decent level of NII in the upcoming quarters with a gradual improvement in the lending scenario. Also, the company has been undertaking efforts to improve non-interest income.
Management expects NII on a fully tax-equivalent basis to jump 48-52%, depending on the speed of interest rate hikes by the Fed, the pace of deployment of excess liquidity and loan growth. Non-interest income is anticipated to increase in the 11-13% range for 2022.
M&T Bank's capital deployment activities remain impressive. The company has come a long way in displaying its capital strength and hiked its quarterly dividend by 9.1% in November 2021. In February 2022, the board of directors re-authorized the repurchase of $800 million worth of shares. The buyback program, originally announced in January 2021, was subsequently suspended for the People's United acquisition.
The stock, which currently sports a Zacks Rank of 1, has rallied 5.7% so far this year. For 2022, the company's earnings are projected to witness year-over-year growth of almost 1%. For 2023, earnings are expected to rise 26.9%.
First Republic Bankhas demonstrated considerable top-line strength. The bank's NII, which is also its primary source of income from operations, witnessed a four-year CAGR of 18% (ended 2021), mainly driven by growth in average interest-earning assets.
In the same time frame, non-interest income grew 19.2%, supported by a steady rise in investment management fees (accounting for almost 66% of fee income as of Mar 31, 2022). Such consistent growth in both NII and fee income suggests optimism about First Republic Bank's top-line strength.
First Republic Bank's balance-sheet growth story remains impressive. The company recorded notable growth in loan balances, driven by increased loan origination volumes with a three-year (2019-2021) CAGR of 22%. Also, its total deposits witnessed a CAGR of 31.7% in the same time frame.
For 2022, management expects loans to grow in the mid-teens on the back of solid momentum in household debt refinance products and professional lines of credit. FRC is also optimistic about its ability to continue generating deposits and onboard new clients, which are expected to support loan growth in the upcoming quarters.
In the year-to-date period, FRC has lost 35%. For 2022 and 2023, the company's earnings are projected to grow 10% and 10%, respectively, on a year-over-year basis. The company, which has a market cap of $25.4 billion, has a Zacks Rank #2 at present.
SVB Financial has a market cap of $26.1 billion. It remains focused on its organic growth strategy, as evident from a consistent rise in loans, deposits and NII over the past several years. The company's net loans saw a CAGR of 41.6% over the last three years (2019-2021). NII and deposits witnessed a CAGR of 23.1% and 28.5%, respectively, over the same time frame. Further, improving non-interest income will likely keep aiding top-line growth.
For 2022, management projects average loans to grow in the mid-30s and average deposit balances to rise in the low-40s. NII is anticipated to grow in the low-50s, while NIM is projected to be 2.10-2.22%.
SVB Financial is expanding through strategic buyouts, which will continue supporting its position as one of the foremost providers of financing solutions to innovative companies. In its efforts to expand into technology investment banking, it acquired the technology equity research firm, MoffettNathanson, in December 2021. In July, it acquired Boston Private, which is expected to further strengthen its private bank and wealth management offerings.
SIVB has also been undertaking efforts to expand globally. While its U.K. and Asia operations seem to be growing, the businesses in Canada and Germany are expected to further boost revenues. Its international (reflects operations in the U.K., Europe, Israel, Asia and Canada) core fee income witnessed a five-year (ended 2021) CAGR of 34%.
SIVB sports a Zacks Rank #1. For 2022, the company's earnings are projected to witness year-over-year growth of 6.4%. For 2023, earnings are expected to rise 32%. The company's shares have plunged 40.7% so far this year.
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