Leader in Human Interface Technology

Synaptics Staying Ahead of Expectations

A Taipan Publishing Group Investment Research Report
By Zachary Scheidt, Editor, Taipan Publishing Group

Synaptics, Incorporated (SYNA) reported new earnings significantly above Wall Street's expectations with earnings hitting 38 cents for the quarter. Despite a weak economic environment, the earnings were actually up 56% from the same quarter last year and 5 cents ahead of analyst expectations. The company saw revenue climb 28% to $101 million, quite an impressive feat for any company in 2009.

In addition to blowing current estimates out of the water, the company also issued strong guidance for the rest of the year. Management expects to earn $0.37 to 0.47 per share in the fourth quarter (fiscal year end is June 30), on revenues of $105 to $115. The Street had been expecting earnings of $0.36 cents and one would likely assume that the company would give relatively conservative guidance. Even at the low end of guidance, the company will finish fiscal 2009 with earnings of $2.09 per share.

Synaptics makes many of the touch applications that were originally cutting edge technology, but are now accepted as common for computers and PDAs. In particular, the company makes the touch-wheel made popular by Apple Inc. (AAPL)’s iPod, as well as the mouse touch-pad used on most laptops. The touchscreens on most popular PDAs are also products made by Synaptics. Although the company has already built a strong market share of roughly 60% for laptop applications, its growth will likely continue to come from mobile devices.

Currently the company has a deal to work on the new Blackberry Storm smart phone being launched by Research In Motion Limited (RIMM), and is also involved in 3 LG touch phones that will be launched later this year. In fact, there are 15 to 20 OEM handsets that are currently in production with Synaptics gear included.

Gross margins were reported at 40.9% for the past quarter, which was a huge relief for analysts. There was some concern of the possibility for a price war to erode profitability, but that does not seem to be a factor at this time. JPMorgan Chase & Co. (JPM) actually believes that over the long-term Synaptics will realize 40 to 45% gross margins and more than 15% operating margins. Paul Coster, who is the analyst for Synaptics, has the stock at “Overweight” and last week he raised the price target from $33 to $36.

The higher price target may still be conservative considering the strong growth Synaptics has been able to record. In 2008, the company saw earnings up 51%, and in the last two years sales levels have been up 45% and 35% respectively. The company has a healthy balance sheet with a cash position large enough to cover all liabilities if necessary.

While no company is immune to competition, Synaptics has done an excellent job of positioning themselves as the leader in their niche industry. There could certainly be additional technologies that have the potential to take market share, but Synaptics is active in re-investing a strong percentage of revenues into research and development in order to stay ahead of the technology curve.

Multiples on growth stocks have certainly contracted in the current environment. But for a company that continues to show fundamental growth and stability, a premium price is likely warranted. Currently, SYNA trades at just 15 times this years expected earnings. Analysts have a conservative view of next year’s growth that is likely weighing on the stock. So despite a fun of 100% since late last year, I still believe SYNA offers an attractive investment for long-term gains. The company has a strong backlog of business and continues to win contracts. A price of $42 (or 20 times current earnings) does not seem unreasonable to me.

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Originally published May 7, 2009.

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