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Some investors like to grab what’s hot and ride the momentum. Others prefer to pick out-of-favor stocks in unloved industry groups in the hopes of a Rocky-like comeback. Then there are those that have a long-term view of the market. They single out stocks that are decent earners and continue to grow year after year. When the market drops, they accumulate more shares. They may sell in 10 years, they might not.

This article is dedicated to those of you looking for a stock with sustainable growth patterns to hold for many years.

Synaptics, Incorporated (NASDAQ:SYNA)
Weekly Price Chart of Synaptics Showing Support at $25

Synaptics designs and supplies all sorts of human interfaces, such as the track-pad on your laptop. Let's look at a few trends with SYNA.

Revenue. Sales is the backbone vehicle of sustainable earnings. Year after year sales have continued to climb, and the 7 year average for sales growth is 26.3%. Growth slid down to 8.8% in 2010, but this year the growth is on track to be 2.5x that with a reported 24.1% net sales growth when tracking the past 9 months.

Profit Margins. Over the last few years the company has paid attention to improving its profit margins, return on assets, and return on equity. They are retaining more of each dollar than they were in 2006 – 2008.

Price Multiples. PE ratios are 14.66, which is well below the industry average of Computer Peripherals. Yet, SYNA is the industry leader when it comes to return on equity. Consider too that the 3 year PE average of SYNA is 26, and the 5 and 7 year average is about 40. As well, the free cash flow is really starting to pour in with 60 cents per share reported this quarter.

What might this stock be trading at in a few years? Here are a few assumptions:

  • PE will be calculated at 20 which is about 1/2 of the 7 year average
  • No dividends will be paid out
  • Return on equity will hold around 20%

In 10 years time, the book value could rise up to $62.47. This means the earnings will be about $12.49 per share. The price of the shares could be around $249.89. This gives us a compound annual growth rate of 24.28% per year. Some of this is based on earnings growth (Calculated using ROE) and some is because I feel the shares are trading at a discount (PE of 20 as opposed to current sub-15). The PEG ratio of 0.77 (Or 0.65 reported by Yahoo) would suggest that this is undervalued based on growth prospects and I’d agree.

Comparison With Industry Group

Ticker

Company

Market Cap(MIL)

P/E

PEG

P/S

P/FCF

ROA

ROE

AUO

AU Optronics Corp.

7388.2

19.02

3.73

0.44

5.96

1.74%

4.07%

FTNT

Fortinet Inc.

3593.74

90.13

5.17

11.07

36.08

8.84%

22.00%

LOGI

Logitech International SA

2638.47

16.39

1.23

1.13

15.17

8.36%

13.90%

NICE

NICE Systems Ltd.

2424.43

50.12

2.5

3.52

18.37

3.32%

4.38%

PANL

Universal Display Corp.

2129.77

n/a

ZBRA

Zebra Technologies Corp.

2116.66

21.87

1.82

2.21

19.92

11.91%

14.11%

SSYS

Stratasys Inc.

1135.64

122.1

6.78

9.7

88.31

5.65%

6.65%

SYNA

Synaptics Inc.

977

14.86

0.77

1.63

11.29

16.85%

23.18%

EFII

Electronics for Imaging, Inc.

845.43

128.8

1.68

21.73

1.09%

1.39%

ELX

Emulex Corp.

841.16

n/a

IN

Intermec, Inc.

690.52

n/a

MRCY

Mercury Computer Systems, Inc.

540.54

14.69

0.98

2.52

35.54

13.35%

17.64%

WAVX

Wave Systems Corp.

265.13

n/a

RSYS

RadiSys Corporation

208.57

n/a

IMMR

Immersion Corporation

198.81

n/a

A quick analysis with the other companies in the industry group will show why I like SYNA. We will look at the top 15 companies by market cap, and remove any of those with negative earnings and no PE ratio (highlighted in red). Of the remaining 9 stocks, SYNA is ranked:

  • Third as regards price to sales ratios (If you like low price to sales ratio stocks, check out these 2 oil field picks)
  • Second as regards price to free cash flow
  • Best as regards low PEG ratio
  • Second lowest PE in the group
  • Best as regards return on equity
  • Best as regards return on assets

While there might be a host of other issues to consider I think Synaptics is worth another look as a stock to add for the next 10 years, They are trying to stay on top of new technology, and they have hidden value with the money being spent on R&D.

After the most recent run-up I expect a small pullback which could be an excellent entry. Keep in mind that some strong support lies at $25, so this gives some confidence to those that dislike momentum stocks that may have run-up too far, too fast.

*If you like growing stocks at a bargain, you may want to look at these 24 growth stocks



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