Mentor Graphics Rips Higher

SAN FRANCISCO -- Shares of Mentor Graphics(MENT Quote - Cramer on MENT - Stock Picks) jumped Friday, following a strong guidance estimate issued Thursday.

Stock in the Wilsonville, Ore., software developer was up $1.80, or 14.4%, to $14.29.

On Friday, Needham analyst Richard Valera reiterated his price target of $18, reflecting the average analyst target reported by Thomson Financial. Mentor is an investment banking client of Needham.

Mentor "has sold off sharply [over 30%] this year, we think baking in a deterioration of fundamentals that -- at least to our eye -- has not occurred," Valera wrote.

In addition to strength in its Veloce product line, the company's acquisition of Sierra Design Automation during the quarter gives the maker of semiconductor design tools a product that solves problems as the chip industry retools down to 45 nanometers.

Designers of low-power, high-performance chips for cell phones run into difficulties when features shrink. "Sierra Olympus, in particular, will ride the wave of industry retooling ... at 65 and 45 nanometers," Chairman and CEO Walden Rhines said on Thursday's conference call.

Mentor paid $35 million in cash for Sierra, and already saw revenue of $12 million in the quarter on more than 75 designs, said President Gregory Hinckley. Designs of 45 nanometers can be quite complex and "are impossible to optimize using existing methodologies," Rhines said. Most of the 75 accounts were designs that failed using competitors' software created for 130 to 90 nanometers, he added. "After Sierra Olympus rescues an existing design, we have the opportunity to be the methodology of choice ... for the next design."

The company's biggest constraint on revenue right now is a limitation on available application engineers, who must assist each client in starting designs using the new Veloce and Sierra technologies, Rhines said.

"We are not currently limited by bookings opportunities," Rhines said. Added sales spread engineers more thinly "as we move the engineers to other customers."