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Cadence (CDNS) Soars to 52-Week High, Time to Cash Out?

Zacks Equity Research
·3 mins read

Shares of Cadence Design Systems (CDNS) have been strong performers lately, with the stock up 9.2% over the past month. The stock hit a new 52-week high of $107 in the previous session. Cadence Design Systems has gained 52.8% since the start of the year compared to the 16.6% move for the Zacks Computer and Technology sector and the 25% return for the Zacks Computer - Software industry.

What's Driving the Outperformance?

The stock has an impressive record of positive earnings surprises, as it hasn't missed our earnings consensus estimate in any of the last four quarters. In its last earnings report on July 20, 2020, Cadence reported EPS of $0.66 versus consensus estimate of $0.52 while it beat the consensus revenue estimate by 7.75%.

For the current fiscal year, Cadence is expected to post earnings of $2.55 per share on $2.6 billion in revenues. This represents a 15.91% change in EPS on a 11.49% change in revenues. For the next fiscal year, the company is expected to earn $2.75 per share on $2.76 billion in revenues. This represents a year-over-year change of 7.91% and 6.13%, respectively.

Valuation Metrics

Cadence may be at a 52-week high right now, but what might the future hold for the stock? A key aspect of this question is taking a look at valuation metrics in order to determine if the company is due for a pullback from this level.

On this front, we can look at the Zacks Style Scores, as they provide investors with an additional way to sort through stocks (beyond looking at the Zacks Rank of a security). These styles are represented by grades running from A to F in the categories of Value, Growth, and Momentum, while there is a combined VGM Score as well. Investors should consider the style scores a valuable tool that can help you to pick the most appropriate Zacks Rank stocks based on their individual investment style.

Cadence has a Value Score of D. The stock's Growth and Momentum Scores are B and A, respectively, giving the company a VGM Score of B.

In terms of its value breakdown, the stock currently trades at 41.6X current fiscal year EPS estimates. On a trailing cash flow basis, the stock currently trades at 26.7X versus its peer group's average of 22.7X. Additionally, the stock has a PEG ratio of 3.03. This isn't enough to put the company in the top echelon of all stocks we cover from a value perspective.

Zacks Rank

We also need to consider the stock's Zacks Rank, as this supersedes any trend on the style score front. Fortunately, Cadence currently has a Zacks Rank of #2 (Buy) thanks to rising earnings estimates.

Since we recommend that investors select stocks carrying Zacks Rank of 1 (Strong Buy) or 2 (Buy) and Style Scores of A or B, it looks as if Cadence passes the test. Thus, it seems as though Cadence shares could still be poised for more gains ahead.

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Zacks Investment Research