Mentor Signals Weakness as Chip Industry Struggles

Mentor Signals Weakness as Chip Industry Struggles
May 24, 2016

Last Thursday, electronic design automation (EDA) company Mentor Graphics Corp. (NASDAQ:MENT) reported a fiscal 2017 first-quarter net loss that widened from the year-ago corresponding period. The non-GAAP earnings, however, exceeded the analysts’ estimates. On this basis, the share price of Mentor appreciated to $20.85 on Monday. However, as explained underneath, the uptrend should be used as an opportunity to exit long positions from the counter.

During the first-quarter, Mentor, the only EDA company with an embedded software solution, reported revenue of $227.639 million, compared to $272.143 million in the prior year corresponding quarter. The revenue estimate of analysts was $219.6 million.

The first-quarter GAAP net loss of the company widened to $13.436 million or $0.12 per share, from $9.885 million or $0.08 per share in the year-ago similar period. Excluding adjustments of $16.062 million, the non-GAAP earnings for the first quarter declined to $2.626 million or $0.02 per share, from $33.544 million or $0.28 per share in the first-quarter of fiscal 2016. The Wall Street earnings estimate for the first-quarter was break-even per share.

The balance sheet reveals that during the first-quarter a decrease in the restructuring and litigation cost to $2.991 million, from $36.977 million in the first-quarter last year, enabled the company to report a non-GAAP profit. The cash and cash equivalents at the end of first-quarter was $216.325 million, down from $249.773 million in the first-quarter of 2016.

In the first-quarter, the capital expenditures of Mentor Graphics have doubled to $10.202 million, from $4.728 million in the similar period of fiscal 2016.

For the fiscal 2017 second-quarter, the Oregon based company anticipates revenue of $245 million. The consensus estimate of analysts for the first-quarter is $246.95 million. For the fiscal 2017, the company has reconfirmed its revenue outlook of $1.215 billion. On an average, the analysts expect revenue of $1.22 billion.

Similarly, for the second-quarter, the company expects GAAP earnings of break-even per share and non-GAAP earnings of $0.09 per share. The earnings estimate of analysts for the second-quarter is $0.11 per share. For the fiscal 2017, Mentor Graphics anticipate non-GAAP earnings of $1.68, which is in line with the Street estimates.

As it can be understood, the company’s revenue and earnings have declined on a y-o-y basis. Furthermore, Mentor Graphics hardly meets the Q2 and FY17 estimates of analysts. Thus, the rise in the share price should be considered as a temporary and mainly due to the non-GAAP earnings, which was higher than the analysts’ estimates. Still, it was considerably lower than previous year’s earnings.

The price chart shows the existence of resistance at 22. Next major support exists only at 18.75. The stochastic reading is nearing the overbought region.

Mentor Graphics - Technical Analysis - 24th May 2016

Thus, a binary options trader should pick a one touch put options contract to profit from the apparent downtrend in the price. A strike price of $19 or higher and an expiry date in the third week of June is recommended for the trade.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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