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Synaptics: Is There Any Upside Left?

- By Soid Ahmad

Synaptics Inc. (SYNA) has been trending upwards amid the recent earnings beat. The company managed to surpass the top-line consensus along with earnings estimates. This indicates fears about inventory buildup and weak demand were out of proportion, which, parenthetically, were already refuted in my previous piece on the company. As I argued before, a competitor's report on weak demand may not have any effect on Synaptics. Therefore, discarding the company was not a good idea in the first place. Earnings for the recent quarter conform to that thesis, and the stock is up around 10% in a single day. Synaptics is up around 23% since my last publication.


Earnings highlights

The company reported revenue of $444.2 million, increasing 10% on a year-over-year basis and beating the consensus estimate by $14.5 million. Revenue growth was supported by a 10% increase in mobile product sales and, surprisingly, a 10% increase in PC product sales. Non-GAAP EPS increased to $1.27, translating into 5% increase from the comparable quarter last year. The company is guiding for mid-point revenue of $430 million for the fourth quarter of 2017, which is in line with the analyst consensus. Moreover, management is confident about the company's touch and display integration (TDDI) and fingerprint opportunity going forward.

It is worth mentioning the company referred to integrating security into TDDI, which currently includes a touch and display driver. Integrating fingerprint technology with TDDI means more bezel real estate, which will make edge-to-edge displays possible. As Synaptics focuses on integrating drivers, the TDDI success can be replicated by integrating fingerprint technology going forward. The company said the following in its earnings call:


"Synaptics is one of the only semiconductor companies that has a pure research effort in the form of a user interface group."



Overall, the earnings beat gives visibility to future earnings amid doubts regarding demand. The company's guidance was in line with analyst estimates, indicating there are not any immediate problems with demand, contrary to what Fingerprint Cards (FPQ1.F) reported.

What does this mean from a valuation perspective?

A valuation analysis was performed in the previous piece on Synaptics, see below:



The idea behind the valuation was to gauge the extremes as there was uncertainty about the future product demand. In addition, it was argued that even the lowest earnings estimates reveal an upside for the stock; the reward/-isk was asymmetric. Now, as the demand scenario is unambiguous, the stock can be valued based on consensus earnings. Based on consensus 2018 EPS, Synaptics is worth around $86. Since the valuation is multiple-based, however, it should be approached with caution. On the other hand, the economic value added-based approach reveals the following:

Assumptions:

  • Consensus earnings are a good proxy for 2017 and 2018.
  • Earnings are expected to grow 10% during 2019 to 2022, which is based on weighted average industry growth in the fingerprint sensor market and Synaptics' serviceable addressable market.
  • Cost of equity is based on the risk-free rate and the balance of money circulation.
  • No dilution is assumed in outstanding shares as Synaptics is consistently buying back stock.



Projections

Notes

2017

2018

2019

2020

2021

Perpetuity

Amounts in millions

Net Income

$173.11

$184.08

$202.49

$222.74

$245.01

$269.51

Cost of capital

r*capital invested

$65.4

$79.2

$94.4

$111.1

$129.5

$149.7

Adjusted Net Income

$107.70

$104.87

$108.09

$111.63

$115.53

$119.82

Discount factor

1.00

0.93

0.87

0.80

0.75

11.52

Economic Value Added

$107.70

$97.55

$93.53

$89.86

$86.51

$1,380.29

Period

0

1

2

3

4

5

Market value added

1$,855

Invested Capital

$699

Value of the equity

$2,554

Perpetual Growth in Residual Earnings

2%

Price Target

$72.2



Focus Equity Estimates

The valuation sheet reveals the stock is worth around $72, translating into an upside of 28.5% after the current rally. Note the valuation is based on consensus earnings and a prudent growth estimate. The stock can move past the $70 barrier as it is trading at a cheaper multiple compared to its counterparts.

Final thoughts

Synaptics has proven its critics wrong, which is evident from its third-quarter earnings results. The fingerprint integration approach is quite interesting, which can lead to a TDDI-like success going forward. Moreover, the need for bezel-less phones makes Synaptics' under-the-glass fingerprint sensor attractive for OEMs. The stock has moved quite a bit after the earnings release. There is still a lot of upside left, however. Endure and ride the bull wave.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

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This article first appeared on GuruFocus.