We are adding Mentor Graphics (NASDAQ: MENT) to our Marketocracy Barnacle Defensive Growth Portfolio. It finally gives us something for our Mid-Cap space, though Morningstar classifies it as Small Cap Core. Based on market capitalization, though, we feel more comfortable calling a mid-cap stock.
Headquartered in Oregon, Mentor Graphics enables, “companies to develop better electronic products faster and more cost-effectively. Our innovative products and solutions help engineers conquer design challenges in the increasingly complex worlds of board and chip design.” To keep it simple, Mentor helps companies to be more efficient through electronic design automation and other technological efficiencies.
For a stock to qualify for the Defensive Growth Portfolio, the company must have reasonable debt, liquidity, positive free cash flow, positive earnings and sales growth, pay a dividend, and reasonable valuations.
Why we like Mentor Graphics:
- P/E is 17, which is well below historical averages
- Debt/Equity is 0.20, which brings into Bullet Proof territory
- Currently, the dividend yield is 0.90%. While small, the company feels comfortable enough in its earnings to return value to its shareholders
- The Quick Ratio and Current Ratio are 1.90 and 2.00 respectively, adding to its financial safety.
- Free cash flow is $119 million
- For the last five years, revenue has grown 7.94% and earnings have grown 27%. The return on equity is a reasonable 12.99%
- Price to sales and price to book are each around 2.0
- Net margins are currently sitting at 13% and gross margins are 87%
As we measure it, the stock has a conservative target price of $23. With the new dividend payments, this gives the stock a margin of safety over 6%. While we would like something stronger, we feel the stock has the potential for more shareholder return with the improving margins, and increased revenue growth from the 2008 recovery.
There are always potential risks to investing, and Mentor is no different. During the downturn, it took things harder than most, and any economic troubles will be magnified in this business, yet that is we focus on allocation and diversification.
This is what others are saying about Mentor Graphics:
- Motley Fool Community (2 stars out of 5)
- Zacks.com (Hold)
- MSN Money (8 out of 10)
- Thompson Reuters (Neutral)
- Market Edge (Neutral from Avoid)
The information contained on this site is for informational purposes only and should not be considered as investment advice or as a recommendation of any particular strategy or investment product. This profile should not be considered as a solicitation for investment services. At this point and time, neither I nor my family have a position in the security discussed.