Synaptics is a Winning Pick, but Wait for the Pullback

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When Synaptics (NASDAQ: SYNA) bottomed in November late last year, the uptrend that followed was not entirely unexpected. Synaptics is a leader in the touch-screen space, and the company solidified its position with design wins in the market place. For 2013, this growth in display integration solutions is expected to continue. The ForcePad and ThinTouch are design wins that are scheduled to be made available later this year.

PC in the Doldrums: No Problem for Synaptics

Synaptics shares were previously held back by the gloomy outlook for the PC market. Ultrabooks did not boost sales as hoped, while tablet demand simply continued to grow, which partly contributed to the weakness in the notebook market. For Synaptics this was bad news, yet laptop computers are not going away any time soon. Sure sales growth was negative, but the industry is an opportunity for specialist plays like Synaptics. Synaptics is expecting that its share of the ultrabook market in 2013 and 2014 will grow, thanks to the introduction to its ForcePad and ThinTouch technology.

Strong Mobile Segment

Synaptics benefited from strong growth in mobile phone and touchscreen applications. Last quarter (for the December quarter), revenue of $143 million was helped by this segment. Non-GAAP gross margins were 48.4%, and the company ended the quarter with non-GAAP earnings of $0.53 per diluted share.

Growth in China

Investors all but expect China to be an important market for the smartphone market. For Synaptics, this is no different: 60% of OEM smartphones were in China. Synaptics has a leadership position in this industry through domestic OEMs that include ZTE, Huawei, and Lenovo.

2013 Outlook

Synaptics thinks that it could grow its market share in ultrabooks this year. Last year, its TouchPad solutions were in 7 out of the 10 top ultrabooks (as ranked by PC Magazine).  The fact that it's incorporation in Microsoft’s (NASDAQ: MSFT) Windows RT, HP’s (NYSE: HPQ) Envy x2, and Dell systems illustrates just how ubiquitous TouchPad solutions is.

Much of the growth in the PC segment will depend on Microsoft and HP. Both companies need to better articulate the benefits of upgrading to a Windows 8-based touch device. Microsoft will be releasing the "Pro" version of the Surface tablet this year.  Although pricing may turn-off buyers, the "Pro" is more complete, and Windows-based software is supported.

HP recently updated the Envy mode, and the new Spectre XT TouchSmart showcases the strengths of Synaptics. Although the laptop could have a better battery life, the touch-interface was well-received by reviewers.

Synaptics currently has a backlog of around $79 million. When customer forecasts and product mixes are considered, Synaptics anticipates revenue will be between $140 million and $148 million in its next quarter ending in March. Gross margins will remain strong at around 47%-48%. The company expects earnings to be $0.50 to $0.58 per diluted share (non-GAAP).

Valuation

Synaptics appears richly valued when compared directly to Microsoft and HP. Its POP (or “Price of Profitability, also known as a forward P/E) is 25:

 

<img src="/media/images/user_15008/syna_large.jpg" />

(Data Source: Kapitall.com)

Synaptics also has a far smaller market capitalization compared to the companies it relies on for growth in the PC segment. Although Synaptics does not pay a dividend, the company generated a respectable level of earnings (EBITDA). This is not surprising, since Synaptics is in an early- to mid-level phase of growth, while Microsoft and HP are in a mature product phase:

<table> <tbody> <tr> <td> <p><strong>NAME </strong></p> </td> <td> <p><strong>MKT CAP </strong></p> </td> <td> <p><strong>AVG VOL </strong></p> </td> <td> <p><strong>EPS </strong></p> </td> <td> <p><strong>YIELD </strong></p> </td> <td> <p><strong>PRICE/SALES </strong></p> </td> <td> <p><strong>EBITDA </strong></p> </td> </tr> <tr> <td> <p>Synaptics Inc.</p> </td> <td> <p>1.09B</p> </td> <td> <p>553,053</p> </td> <td> <p>1.2</p> </td> <td> <p>-</p> </td> <td> <p>2.09</p> </td> <td> <p>64.65M</p> </td> </tr> <tr> <td> <p>Microsoft Corporation</p> </td> <td> <p>229.84B</p> </td> <td> <p>54,619,300</p> </td> <td> <p>1.82</p> </td> <td> <p>3.3</p> </td> <td> <p>3.21</p> </td> <td> <p>28.87B</p> </td> </tr> <tr> <td> <p>Hewlett-Packard Company</p> </td> <td> <p>31.52B</p> </td> <td> <p>30,961,500</p> </td> <td> <p>-6.41</p> </td> <td> <p>3.2</p> </td> <td> <p>0.27</p> </td> <td> <p>14.66B</p> </td> </tr> </tbody> </table>

(Data Source: Yahoo! Finance)

Bottom Line

Investors should expect Synaptics shares to drop in the short-term, as investors lock in gains. Despite strong revenue from the tablet and phone space, the focus will return on the importance of the PC segment for profit growth. Synaptics is well-positioned in the computing space. For this reason, growth should be expected to continue. Synaptics expects topline growth of between 6% and 12%. As a leader in the touchscreen space, Synaptics could be expected to be included by more brands. This ensures the company’s growth story is not yet over.


chrispycrunch has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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