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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. (SNPS) is second to Cadence Design Systems (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