Synopsys, Inc. (NASDAQ:SNPS)’s analysis versus peers uses the following peer-set: ARM Holdings plc (NASDAQ:ARMH), Autodesk, Inc. (NASDAQ:ADSK), ANSYS, Inc. (NASDAQ:ANSS), Cadence Design Systems, Inc. (NASDAQ:CDNS), National Instruments Corp (NASDAQ:NATI) and Mentor Graphics Corp (NASDAQ:MENT). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Annual (USD million) | 2012-10-31 | 2011-10-31 | 2010-10-31 | 2009-10-31 | 2008-10-31 |
|---|---|---|---|---|---|
| Revenues | 1,756.0 | 1,535.6 | 1,380.7 | 1,354.7 | 1,337.0 |
| Revenue Growth % | 14.4 | 11.2 | 1.9 | 1.3 | 10.3 |
| Net Income | 182.4 | 221.4 | 237.1 | 167.7 | 190.0 |
| Net Income Growth % | (17.6) | (6.6) | 41.4 | (11.7) | 45.6 |
| Net Margin % | 10.4 | 14.4 | 17.2 | 12.4 | 14.2 |
| ROE % | 7.9 | 10.5 | 12.0 | 9.9 | 12.8 |
| ROA % | 4.9 | 6.7 | 7.6 | 5.9 | 7.1 |
Valuation Drivers
Synopsys Inc.’s current Price/Book of 1.9 is about median in its peer group. The market expects SNPS-US to grow earnings about as fast as the median of its chosen peers (PE of 26.5 compared to peer median of 32.3) but not to expect much improvement in its below peer median rates of return (ROE of 7.9% compared to the peer median ROE of 12.7%).
The company employs relatively high amounts of assets (with a turnover of 0.5x compared to peer median of 0.7x) while generating profit margins of 10.4% that are only about median among its chosen peers. SNPS-US’s net margin is its lowest relative to the last five years and compares to a high of 17.2% in 2010.
Economic Moat
SNPS-US’s revenues have changed in-line with its peers (year-on-year change in revenues is 14.4%) but its earnings have lagged (annual reported earnings have changed by -17.6% compared to the peer median of 18.0%), implying that the company has less control over its costs relative to its peers. SNPS-US is currently converting every 1% of change in revenue into -1.2% change in annual reported earnings.
SNPS-US’s return on assets is now less than its peer median (4.9% vs. peer median 7.9%) in contrast to its returns over the past five years which were around the peer median (6.4% vs. peer median 7.0%). Recent performance suggests that the company’s historical competitive advantage is slipping away.
The company’s gross margin of 85.6% is around peer median suggesting that SNPS-US’s operations do not benefit from any differentiating pricing advantage. In addition, SNPS-US’s pre-tax margin of 11.5% is also around the peer median suggesting no operating cost advantage relative to peers.
Growth & Investment Strategy
SNPS-US’s revenues have grown at about the same rate as its peers (9.0% vs. 8.7% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 26.5. The historical performance and long-term growth expectations for the company are largely in sync.
SNPS-US’s annualized rate of change in capital of 12.7% over the past three years is around its peer median of 11.4%. This median investment has likewise generated a peer median return on capital of 10.1% averaged over the same three years. This median return on investment implies that company is investing appropriately.
