ANSYS (NASDAQ: ANSS) is a globally recognized brand providing engineering software and services that are used to simulate various situations. Its products are used by engineers, designers, researchers, and students alike. ANSYS Workbench is the platform on which its flagship products are used. Workbench will simulate the results of almost anything imaginable, such as testing the structural integrity of a building, allowing users to save both time and money on experiments that might not even lead to the same accurate results. The company's products include simulations for meshing, structures, explicit dynamics, composites, fluids, electronics, systems, and physics applications. In addition to its professional portfolio of products, it provides an academic suite, most often used by doctorate students.
Source: Company Presentation
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The company employs over 2,700 people across 40 countries in the Americas, Europe, and Asia. It has customers such as Lockheed Martin (LMT), 3M (MMM), Toyota (TM), Seagate (STX), DuPont (DD), Whirlpool (WHR), Deere (DE) and many more across a variety of industries. It serves 96 of the top Fortune 100 companies. Not only does it work with large US companies, but with others internationally. Sales by region in Q1 of 2014 were composed 36% from North America, 35% from Europe, and 29% from GIA. Its diversity in both industries it serves, as well as in geographic region has allowed it to stay successful despite downturns in various industries and regions. (Company presentation)
Source: Yahoo Finance
ANSYS has had stellar success historically, appreciating 520% over the past ten years, and 130% over the past five years. More recently, the stock is trading down 15% YTD, providing a buying opportunity for this company with a history of success. Although shares stalled towards the end of 2013, and in 2014 have been down, it hasn't been in line with earnings. Earnings reports for the past four quarters have all met or exceeded expectations, and because of the company's healthy financials, I expect these results to continue in Q2 2014 and beyond.
Since 2009 sales have increased steadily, and the company is projecting sales growth over 10% for 2014.
The same goes for net income and EBIDTA.
In 2009, the company had $198.32M of long-term debt, which was reduced to $127.56M in 2010, $53.15M in 2011, and since 2012, the company has run with zero debt on its balance sheet.
Both operating and net profit margins are outstanding, coming in at 37.37% and 28.48% for 2013 and 36.73% and 26.27% for Q1 2014, respectively, handily beating competitors such as AutoDesk (ADSK), Dassauult (DASTY) and Cadence Design Systems (CDNS), all while maintaining a lower P/E ratio, having zero debt, consistent free cash flows, and significant growth.
Free cash flow has grown well over time, from $165.38M in 2009 to $304.14M in 2013, representing a year-over-year growth rate of 83.9%. Free cash flow in Q1 2014 was $127.55M.
Per the company's 10K:
The best use of its excess cash is to invest in the business and, to repurchase stock in order to offset dilution and to return capital to stockholders in excess of our requirements with the goal of increasing stockholder value. Additionally, the company has in the past, and expects in the future, to acquire or make investments in complementary companies, products, services, and technologies.
The company's strategy for growth is through acquisitions, and as ANSS sees increases in demand for its products, this strategy will increase its already strong global presence over time and provide value for shareholders. In 2011, ANSS acquired Apache Design Inc. for $314M, whose software allows users to maximize efficiency in electronics design. In 2012, Esterel was acquired for $58.2M, allowing the company to design, simulate, and automatically produce software itself. Applications range from aircraft, to energy systems and medical devices -- any industrial product with a CPU. In April 2013, Evolutionary Engineering AG, a provider of optimization technology for composites, was purchased for $8.1M. On January 3, 2014, Reaction Design was purchased for $19M. The provider of chemistry solutions in combination with ANSYS' computational fluid dynamics solutions will provide some of the best simulation tools on the market. Most recently in May, SpaceClaim, a 3D modeling software company, was purchased for $85M. These complementary companies have helped ANSYS to grow by both expanding its range of products and extending applications to new fields, as well as by using ANSYS's existing global scale to grow the acquired products itself.
The company currently trades at a P/E of 28.12 and EPS of 2.64, which has shown steady increases year over year since 2009. Although a P/E of 28.12 is relatively high given the S&P average of 19.56, the company is still undervalued given its growth and potential growth catalysts. Additionally, management has stated that it intends to repurchase more stock in 2014, as it has in both 2012 and 2013. Since late 2013 the share price has stalled, but P/E has dropped significantly from its high, providing an opportunity for investors to pick up shares.
Source: YCharts (click to enlarge)
Greg Satell of Forbes wrote an article titled, "Why the Future of Innovation is Simulation", which highlights the various benefits to simulations in an increasingly engineered world. The Institute for the Future also believes simulation and virtuality will be crucial in coming years. As the world we live in is dominated more and more each day by machines, and as the "Internet of Things" is looming, ANSS has given itself a tremendous opportunity for success. The market for simulation software is growing rapidly, and ANSYS' success thus far has allowed it to acquire complementing companies that grow its brand. I expect that ANSYS will continue on this path. Additionally, its strong free cash flow, zero debt, and high margins have positioned it well to capture a greater portion of the growing market for simulation software, and investors will see greater returns for it.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.