Cadence Design Systems, Inc. is Attracting Investor Attention: Here is What You Should Know

Cadence Design Systems CDNS has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.

Over the past month, shares of this maker of hardware and software products for validating chip designs have returned -2%, compared to the Zacks S&P 500 composite's +3.8% change. During this period, the Zacks Computer - Software industry, which Cadence falls in, has gained 1%. The key question now is: What could be the stock's future direction?

Although media reports or rumors about a significant change in a company's business prospects usually cause its stock to trend and lead to an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.

Revisions to Earnings Estimates

Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.

Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.

For the current quarter, Cadence is expected to post earnings of $1.23 per share, indicating a change of +0.8% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

For the current fiscal year, the consensus earnings estimate of $5.93 points to a change of +15.2% from the prior year. Over the last 30 days, this estimate has remained unchanged.

For the next fiscal year, the consensus earnings estimate of $6.85 indicates a change of +15.4% from what Cadence is expected to report a year ago. Over the past month, the estimate has remained unchanged.

With an impressive externally audited track record, our proprietary stock rating tool -- the Zacks Rank -- is a more conclusive indicator of a stock's near-term price performance, as it effectively harnesses the power of earnings estimate revisions. The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for Cadence.

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

Projected Revenue Growth

While earnings growth is arguably the most superior indicator of a company's financial health, nothing happens as such if a business isn't able to grow its revenues. After all, it's nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it's important to know a company's potential revenue growth.

In the case of Cadence, the consensus sales estimate of $1.05 billion for the current quarter points to a year-over-year change of +7.4%. The $4.59 billion and $5.19 billion estimates for the current and next fiscal years indicate changes of +12.1% and +13.1%, respectively.

Last Reported Results and Surprise History

Cadence reported revenues of $1.01 billion in the last reported quarter, representing a year-over-year change of -1.2%. EPS of $1.17 for the same period compares with $1.29 a year ago.

Compared to the Zacks Consensus Estimate of $1.01 billion, the reported revenues represent a surprise of -0.49%. The EPS surprise was +3.54%.

The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates three times over this period.

Valuation

No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.

Comparing the current value of a company's valuation multiples, such as its price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its own historical values helps ascertain whether its stock is fairly valued, overvalued, or undervalued, whereas comparing the company relative to its peers on these parameters gives a good sense of how reasonable its stock price is.

The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to grade stocks from A to F (an An is better than a B; a B is better than a C; and so on), is pretty helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

Cadence is graded D on this front, indicating that it is trading at a premium to its peers.

Bottom Line

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Cadence. However, its Zacks Rank #3 does suggest that it may perform in line with the broader market in the near term.

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