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Annotated article summary from this weekend's Barron's; receive all our Barron's summaries by signing up here:

Designing New Profits by Leslie P. Norton

Summary: Synopsys Inc. (NASDAQ:SNPS) is second to Cadence Design Systems (NASDAQ:CDNS) in automated chip design, and dominates the digital chip design market. In Aug. 2003 Barron's called it "one of the best technology stocks you've never heard of;" it jumped 17% in six months. But after operating margins fell from almost 30% to 10% and bookings dropped, share prices plummeted almost 60%. Much of that was due to an accounting change, and its present accounting methods make an earnings miss risk almost nil; its order backlog is $2 billion. And with current operating margins of 18% vs. Cadence's 30%, big institutional investors are correct on insisting Synopsis still has huge growth potential. Chip industry revenues have now returned to pre-2001 slump levels as strong chip sales are driven by the demand for video. In February Synopsis made $0.16 a share, beating analyst estimates. For 2007 (ending in October) it forecasts $1.23-1.31/share, up from last year's $0.77. It says it wants to boost margins to "the mid-to-high 20s" in the coming years. Shares could be worth 25% to 40% more than their current $25.15; Vishal Saluja of JW Seligman thinks the stock will find its way to $36.

Related Links: SNPS: On Merrill Lynch's Short ListSynopsys F1Q07 (Qtr End 1/31/07) Earnings Call Transcript

Synopsis 11 03 2007

Source: Synopsys Keeps Chipping Its Way Back - Barron's