Can Synopsys (SNPS) Surprise Earnings Estimates in Q3?

Synopsys Inc. SNPS is set to report third-quarter fiscal 2015 results on Aug 19. Last quarter, the company posted a positive earnings surprise of 9.38%. It is worth noting that Synopsys has outperformed the Zacks Consensus Estimate in all the four preceding quarters with an average positive earnings surprise of 78.74%.

Let us see how things are shaping up for this announcement.

Factors to Consider

Synopsys’ second-quarter top line witnessed a significant year-over-year improvement. The improvement came mainly on the back of higher adoption of Synopsys’ products and effective cost management. The company’s earnings also came ahead of the Zacks Consensus Estimate.

Recently, Synopsys announced the acquisition of Bluetooth Smart IP from Silicon Vision — a leading provider of high-performance, ultra-low-power wireless IP solutions — in line with its strategy of growing through acquisitions. Moreover, through the acquisition, Synopsys will gain Bluetooth Smart IP’s customers thereby boosting its top line.

Synopsys is a vendor of electronic design automation (EDA) software to the semiconductor and electronics industries. We believe the company’s recent product launches, acquisitions and deal wins will boost results, going ahead. Moreover, unique intellectual properties and global support provided by the company will likely drive its forthcoming results. Additionally, the company’s acquisition of Coverity will expand its reach in the software quality, testing and security tools market.

However, competition from Cadence Design Systems Inc. CDNS and Mentor Graphics Corp. coupled with a challenging technology spending environment and uncertainty regarding the exact time of realizing acquisition synergies keep us on the sidelines.

Earnings Whispers?

Our proven model does not conclusively show that Synopsys will beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 30 cents. Hence, the difference is 0.00%.

Zacks Rank: Synopsys’ Zacks Rank #2 (Buy) when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Here are some other companies, which you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Intuit Inc. INTU with an Earnings ESP of +32.00% and a Zacks Rank #3 (Hold)

Seadrill Partners LLC SDLP with an Earnings ESP of +2.04% and a Zacks Rank #1 (Strong Buy)

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