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If only I could, I would build a rocket and soar far away from this market. But building a rocket is hard -- I'd have to perfect a design, figure out a way to subject it to simulated atmospheric pressure changes, build a miniature model to make sure it looks cool, and order about 20% more material than I actually need to account for waste in the construction process. Or, I could just use Autodesk's (NAS: ADSK) 3-D design software which would handle most of that for me. To the moon I go ... so long, and thanks for all the fish!
On second thought, I'll just purchase a 4% allocation of Autodesk for the Un Portfolio and know I'm getting a premium business at a pedestrian price. Over time, shares of Autodesk should help shoot the Un Portfolio to the moon.
Crafting a wonderful business
Autodesk's software products allow creative professionals and engineers to model and test their ideas in 3-D by generating digital prototypes and simulations. Engineers use it to design buildings and bridges, stress test them, and use the designs to make construction more efficient. The company's products have revolutionized the manufacturing and construction industries, and currently are having a transformational impact on the entertainment industry, too (if you've seen Avatar, you know).
Sure, Autodesk's software is technologically advanced -- and it had better be, as a quarter out of every sales dollar gets pumped back into research and development. But it has become the industry standard: Autodesk's software is taught to students in engineering and design programs across the globe, and its massive installed base make the cost of switching to another design software program painful. It controls 12.5% of its addressable market, but still has plenty of room to grow.
5-Year Average ROIC
Long-Term Growth Rate
Normalized FCF Yield
Parametric Technology (NAS: PMTC)
ANSYS (NAS: ANSS)
Sources: Capital IQ (a division of Standard & Poor's) and Morningstar.
The three big reasons I'm buying
The Autodesk ecosystem: Autodesk sells its products directly to large customers, but uses 2,000 value-added resellers and other channel partners for smaller users of its products. These partners are trained on the company's software, so they're psychologically invested in selling it. Another 3,400 folk have developed supplemental software and applications off of Autodesk's software. And another 1,200 authorized training centers exist around the globe to tutor and teach the use of the company's products. This sales, business, and training ecosystem (I like to picture it as the Autodesk Army) helps ensure Autodesk's software is continually entrenched in design and engineering firms worldwide.
Network effects: The process of building something -- be it a building or a motion picture -- involves many parties. Autodesk has garnered acceptance from designers, manufacturers, and suppliers, and its software allows these parties to share digital designs prior to construction, saving time, money, and errors. As more professionals adopt Autodesk's software, its value increases as a common industry language.
Quality: Autodesk is an extremely high-quality company. It consistently generates high returns, grows earnings, produces solid cash flow, and does so without using debt. Historically, investors pay a premium for the company's shares -- 24 times expected earnings. Today, we can buy shares for just over half that price.
What's so "Un" about Autodesk?
Global economic fears are mounting and investors are worried that will translate to a slowdown in Autodesk's sales. In the last major slowdown, sales declined 23% from peak to trough and operating income fared even worse. True, although the company's three primary end markets (manufacturing, construction, and media) are all susceptible to a growth slowdown, I believe Autodesk's software is more essential than optional. Additionally, growing subscription revenue (the company calls it "maintenance" revenue) will add stability to the company's performance. And while piracy continues to siphon revenue away from Autodesk (80% to 90% of its software in emerging markets is pirated), distributing through the cloud should help bring these rates down.
That's a buy
Autodesk is unloved these days -- its shares are down 36% this year, versus a decline of only 9% in the broader market. Yet the company continues to grow, strengthen its ecosystem, and build a cash war chest -- now 20% of its market value. I'd happily buy this entire business if I had $6 billion, but I'm keeping the initial investment small, to just 4% of the Un Portfolio's capital. However, I'd be happy to add to the position if shares continue to slide. While there could be more pain as the global economic picture gets murkier, I'm confident Autodesk's business will persist, strengthen, and increase in value.
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At the time thisarticle was published Bryan Hinmondoes not own shares of any company mentioned.Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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