Today, we look at a growth stock that is travelling in the right direction with its software. While its systems improve design efficiency for many electronic products, Mentor Graphics has enjoyed exceptional growth in the auto business. Its software is in great demand as automakers shift from mechanical to electronic systems. The company’s revenues are rising and its strong financial position lets it devote abundant resources to the research needed to keep it competitive in a changing market. Mentor Graphics became a recommendation of Stock Pickers Digest, our advisory on more aggressive investing, in March 2015.
Recently we profiled a growth stock in medical research that continues to progress following the spinoff of its electronics testing division: Agilent Technologies aims to grow even faster after spinoff. In addition you will discover a number of key guidelines on how to identify the best growth stocks in What are growth stocks?
MENTOR GRAPHICS CORP. (Nasdaq symbol MENT; www.mentor.com) makes systems that improve the design of electronic products and speed up their development. Its products are used in a range of industries.
As an example, Mentor’s software lets automotive component and chip makers use less wiring, identify potential safety and security issues and minimize electromagnetic effects on sensitive modules. The auto business is one of the company’s biggest growth areas because it’s quickly shifting from mechanical to electronic systems: electronics now make up roughly 40% of a car’s cost.
Whether or not regulators ever approve a true driverless car, research on those vehicles is rapidly accelerating advanced driver assistance systems, such as collision avoidance; infotainment, including GPS; and connectivity apps that record data about a car’s performance, sync with smartphones and notify emergency services.
The conservative approach to aggressive investing
Big gains let you enjoy the benefits of your investments now. And subscribers to Stock Pickers Digest find out about rising stocks they can invest in with confidence. They get Pat McKeough’s conservative approach to aggressive investing, a search for hidden value that yields big gains without excessive risk.
One example of Pat’s approach—the 502% rise in Alimentation Couche-Tard since he made it his Aggressive Stock of the Year in 2012.
Growth stocks: 70% of Mentor Graphics’ profits typically come in busy fourth quarter
In the three months ended July 31, 2015, Mentor’s revenue rose 8.0%, to $281.1 million from $260.2 million a year earlier. Earnings per share jumped to $0.36 from $0.23. The company makes about 70% of its profits in its fiscal fourth quarter, which ends January 31. That’s the busiest period in its customers’ purchasing cycle.
Mentor holds cash of $295.4 million, or $2.54 a share, and has low debt. It spends a very high 33% of its revenue on research to keep ahead in its competitive and constantly changing markets.
The stock trades at 13.3 times this year’s forecast earnings of $1.90 a share. It yields 0.9%.
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