SNPS Shows Potential

Zacks senior information technology analyst Steve Biggs, CFA has come out with a Hold rating on Synopsys, Inc. (SNPS), in recent report on the company.  We excerpted the following details:

'Synopsys is benefiting from increasing complexity of semiconductors, faster design cycles demanded by consumer electronics, and more challenging shrink cycles, all of which help drive demand for its software. The company's entry into the mainstream part of the market should also help it grow its revenue. However, we believe that this is fully accounted for in the stock price, and its time-based revenue model greatly reduces the possibility for a meaningful upside surprise.

'Shares of SNPS are currently trading at 19.2x our fiscal 2008 earnings estimate of $1.31. Although this is a discount to industry mean, we believe the ratable license model lacks some of the upside potential of other software companies and this mean is likely skewed by small companies with high multiples. On the other hand, there is also limited downside to the shares as results are very predictable.

'We still have long-term concerns over constrained spending by semiconductor firms on design software as well as SNPS high level of options expenses relative to EPS. We, therefore, maintain a Hold recommendation on the shares and set our six-month target price to $26.50 based on a P/E multiple of 20.2x 2008 earnings estimate, a discount to industry median.' 

Raising Target for Charlse Schwab

An update has just come out today on Charles Schwab Corporation (SCHW), in which Zacks financial services analyst Neena Mishra is restating her Hold rating on the company.  We excerpted the following details:

'SCHW is scheduled to release its 4Q07 and full-year earnings results on January 14, 2008. 3Q07 diluted earnings from continuing operations were $0.27 per share, three pennies ahead of our expectations. Net revenues were better than our forecast, while operating expenses were slightly lower. The quarter was also boosted by repurchases. Growth remained solid, with net new assets up 66% year-over-year.

'Current relative valuation actually looks good on a P/E-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate (which is 72% higher than peer group median). SCHWs PEG ratio is now 1.31, a 34% discount to the 2.00 median for the peer group (versus a 44% discount previously). We do not follow any of the peers, but the differences in growth rates are becoming significant.

'On a price-to-book basis, the 101% premium continues to look very expensive given a ROE 11% below median (the ROE-adjusted P/B is 129% above median, versus a 66% premium previously). On an absolute basis, both the P/E and the P/B are at the expensive end of our own comfort range, although the online brokers have clearly traded well above these levels in the past.

'Fundamentals appear to remain strong (although the sale of UST has muddied the comparisons significantly), and there remains significant scarcity value in the stock. Based on continued strong performance, we are raising our six-month price target to $26.50 per share. Our $26.50 price target (up $2.50) equates to 21 times our EPS estimate for FY2008. We view the $0.20 annual dividend as secure, implying an 8.2% expected total return over the period, consistent with our Hold rating.'

Questions About Infosys Growth

Zacks information technology analyst Abdul Saleh prefers to remain neutral and recommend a Hold rating to software solutions firm Infosys Technologies Ltd. (INFY) in his latest report. Here are some excerpts:

'INFY continues to strengthen strategic alliances and reorganize businesses in order to counter the effects of a strong rupee. The company was able to improve operating margins in the second quarter despite higher attrition rate, higher wages, and appreciation of the rupee, which were likely to pressure margins in the quarter. These effects were offset by higher utilization of its workforce, increase in blended billing rates and reduction in costs.

'The company's shares are presently trading at roughly 25.5x our fiscal year 2008 EPADS estimate of $1.98. While our FY2008 estimates call for year-over-year revenue and earnings growth of 34.7% and 31.7%, respectively, we believe the company is on target with a slew of large-scale and longer duration BPO deals even as competition intensifies for larger deals and growth on a larger scale becomes more difficult. We are also concerned that there will be a supply problem in hiring new and experienced consultants as more and more business move into India, and there are only so many skilled workers to hire.

'The higher attrition rates, coupled with moderate growth have us concerned about the remainder of [fiscal] 2008, although the company continues to manage its bottom-line well. One high-risk area for Infosys remains its over exposure to the U.S. market which accounts for more than 62% of revenues and therefore it is more prone to adverse effects of currency.

'We have slightly raised our 2008 revenue estimates to the higher end of the guidance range, although wages, currency and attrition remain our major concerns. We continue to rate INFY a Hold and have fixed a target price to $46.75 over the next six months, which translates to a P/E of 23.6x our 2008 EPADS estimate.'

Electroglas a Hold

The following excerpts explain why Zacks senior electrical industry analyst Ken Nagy, CFA continues to adopt a cautious approach towards Electroglas, Inc. (EGLS), the automated wafer prober manufacturer:

'Electroglas is an OEM of wafer prober and wafer test handling systems. November top and bottom-line results were in-line with consensus estimates. While the long-term outlook in probers for EGLS is positive, the short-term cash burn is concerning. That said, the company is poised to have its first cash flow positive quarter as it will sell inventory to Flextronics International Ltd. (FLEX).

'Management has embarked on a new aggressive plan to lower breakeven to $14-$15 million (from $18-$19 million). The shares are currently trading at a 1.0x multiple of our fiscal 2008 revenue estimate (P/S). The company delivered in-line results and provided guidance for positive cash flows next quarter.

'The company has launched a revamped product line, but significant sales growth is unproven. The product line transition has been slow.