Through acquisitions and in-house development, Cadence Design Systems, Inc. (CDNS) has assembled a comprehensive, end-to-end EDA solution that addresses most tasks in the design process. The company has released numerous solutions over the past year to help engineers deal with increasingly complex designs.
However, 2008 looks to be a challenging year for CDNS, which is now expecting declining revenue. CDNS shares are currently trading at 14.2x our 2008 earnings estimate of $0.77 per share and 2x our 2008 sales estimate of $5.44 per share.
This P/E multiple is a discount to its industry mean and median. Given CDNS' dramatically lowered outlook for 2008, we believe that the stock should trade at a discount to its peer group.
On February 20, 2008, Cadence announced that its Board of Directors has approved a stock repurchase program to buy back an aggregate of up to $500 million of its common stock, effective immediately. This approval is in addition to approximately $8.36 million remaining under the company's previous stock repurchase authorization.
More challenging economic conditions are likely to affect the semiconductor industry and flow through to the EDA market as well, although at this point Cadence appears to be the hardest hit. CDNS' closest competitor is Synopsis, which is currently trading at 16.5x 2008 estimates, but with a much higher growth rate.
As such, we maintain a Hold rating on Cadence shares and adjust our price target to $11.50, which represents a P/E multiple of 14.9x our 2008 EPS estimate of $0.77. We believe this multiple is quite reasonable.
Read the full analyst report on CDNS.
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