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Synopsys Up to Strong Buy: Should it Be in Your Portfolio?

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On Oct 18, 2016, Zacks Investment Research upgraded Synopsys Inc. (SNPS - Free Report) to a Zacks Rank #1 (Strong Buy). With a robust return of 23.7% over the past one year and an encouraging revenue guidance for the fourth quarter and fiscal 2016, Synopsys is an attractive investment opportunity.

Why the Upgrade?

Synopsys recently announced expansion of its existing share repurchase program, which has increased the authorization to $500 million. The step reflects the California-based company’s sound financial position and favorable prospects.

Synopsys' board of directors first approved the stock repurchase program way back in 2002. The company’s financial strength, validated by its strong cash position and liquidity, allows it to continue with its buyback program.

As of Jul 31, 2016, Synopsys’ cash, cash equivalents and short-term investments were $1.089 billion, while short-term debt was only $277.5 million.

In May, the company announced that it will buy back $125 million worth of its common stock under an accelerated share repurchase (ASR) program. We note that the company had nearly $175 million remaining under its normal share repurchase program at the end of the third quarter of 2016.

Meanwhile, the company reported impressive third-quarter results. Revenues saw a year-over-year improvement, mainly on the back of higher adoption of Synopsys’ products and strength in hardware products. Additionally, the company provided encouraging fourth quarter guidance and raised its fiscal 2016 outlook.

For fiscal 2016, the company now expects revenues in a range of $2.410–$2.425 billion (previously $2.360–$2.400 billion). The Zacks Consensus Estimate for revenues is pegged at $2.417 billion.

Non-GAAP earnings per share are now projected between $3.00 and $3.03 (previously $2.95 and $3.00). The Zacks Consensus Estimate for earnings is pegged at $1.72 per share. The company projects cash from operations in the range of $525 million to $545 million (previously $510 million to $530 million).

For fourth quarter fiscal 2016, the company expects revenues in the range of $621 million–$636 million (mid-point $628.5 million). The Zacks Consensus Estimate for revenues is pegged at $628 million. Management expects non-GAAP earnings per share in the range of 75 cents–78 cents, higher than the Zacks Consensus Estimate of 46 cents.

With respect to earnings surprise, Synopsys has surpassed the Zacks Consensus Estimate in three out of the last four quarters with an average positive surprise of 25.1%.

Moreover, the stock looks attractive from a valuation perspective. This is because Synopsys currently trades at a forward P/E of 34.81x as against the industry group average of 57.80x, which signifies a huge upward potential.

Furthermore, we believe the company’s recent product launches, acquisitions and deal wins will boost results, going ahead. Moreover, unique intellectual properties and global support provided by the company will likely drive its forthcoming results.

However, competition from Cadence Design Systems Inc. (CDNS - Free Report) and Mentor Graphics Corp. , a challenging technology spending environment and uncertainty regarding the exact time of realizing acquisition synergies keep us on the sidelines.

SYNOPSYS INC Price and Consensus

Stock to Consider

A stock worth considering in the technology sector is, Inc. (AMZN), which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

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