Synaptics Is Really Cheap

Aug. 6.10 | About: Synaptics Incorporated (SYNA)

We live in a world of compressing P/Es. This is having the effect of pushing the valuations of solid growth technology companies down to levels never seen before. Synaptics (NASDAQ:SYNA) is a company with such a cheap valuation.

As of August 5, Synaptics has a forward P/E of 11 and a PEG ratio of .76. It is priced like a value stock even though it has doubled revenues and earnings in the last three years -- during a recession!

Synaptics makes human interfaces (mostly touchpads and touchscreens) for a variety of PC and smartphone devices. Big customers include Dell (NASDAQ:DELL), LG (OTC:LGERF), Ericsson (NASDAQ:ERIC), HTC, and Sony (NYSE:SNE). The company has grown fast, roughly doubling revenue and earnings since 2007, at a time when the economy has been dark, at best. During this time, the stock price has been volatile, but largely flat, and the stock price relative to earnings has gotten cheaper and cheaper.

In its recent earnings report, the company reported net income of $19.3 million, or 54 cents a share, compared with $12.4 million, or 34 cents a share, a year ago. Synaptics earned 70 cents a share. Revenue hit $145.8 million, a rise of 27% over last year. Analysts were expecting 63 cents a share, excluding items, on revenue of $141.1 million. What happened?

Several analysts have expressed concerns over expenses and profit margins going forward, but isn't this a bit short-sighted for a company on a healthy growth spurt, taking advantage of solid trends toward its technology?

The updside for Synaptics is that it is entering a lot of interesting growth markets, including those for large-screen displays and TVs, tablet computers, and smarthphones. It's a wide play on a lot of growth markets where human-screen interfaces are becoming more important than ever.

Other quality metrics are good: Return on Equity is 24%. The company has a market cap of about $1B but it's also got $170M in the bank and operating cash flow of $83. If the company can just maintain a 25% growth rate over the next two years, it's an easy double.

Disclosure: no position