Mentor Graphics: Earnings Please Investors

Includes: HPQ, JAVA, MENT
by: Hilary Kramer

Guest blogger: Larry Schutts, vice president of and a contributing editor for Larry looks for stocks with technical and fundamental characteristics indicating gains in the next 30 days. However, price movements may be volatile. He includes a stop-loss price in each post. Consider selling a position should the stop-loss be violated.

The design of electronic hardware components has become so intricate a process that engineers use digital simulation products to avoid long verification cycles and the expense of manufacturing multiple prototypes. This leading provider of design automation software and systems is headquartered in Wilsonville, Oregon.

Mentor Graphics (NASDAQ:MENT) provides electronic design automation software and systems that engineers use to design, analyze, simulate, model, implement and verify the components of electronic systems. Firms use Mentor's software to produce such products as computers, routers, and cellular handsets. The company also provides consulting and support services. Mentor has business partnerships with Hewlett-Packard (NYSE:HPQ) and Sun Microsystems (JAVA).

The firm pleased investors last week, when it reported Q2 EPS of 15 cents and revenues of $205.7 million. Analysts had been expecting 8 cents and $200.2 million. The CEO noted strength across all of the company's system related product lines. Management also guided FY08 EPS to $1.02 (98 cent consensus), FY08 revenues to about $860 million ($856.04M consensus), FY09 EPS to $1.22 ($1.15 consensus) and FY09 revenues to about $920 million ($912.44M consensus).

MENT shares popped through 50-day and 90-day moving average resistance on the news and have since been forming a bullish "flag" consolidation pattern. Equities frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the issue with two "strong buys," three "buys" and three "holds." Analysts see a 19% growth rate through the next year. The stock's Price to Book ratio (2.03) and EPS Growth rate (400%) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 95% of the outstanding shares. The stock is one of those used to calculate the S&P 400 MidCap Index. Over the past 52 weeks, it has traded between $10.85 and $19.36. A stop-loss of $12.20 looks good here.