3 Stocks With A Niche In The Simulation Industry

|
Includes: ANSS, GVP, SLP
by: Sergio Heiber

Summary

The Simulation industry is in early stages and has experienced only 10% penetration of its target market.

ANSS is the simulation market share leader and has solid financials.

GVP is the market leader in providing simulation services to the resurgent nuclear industry and is on the verge of becoming profitable.

SLP is the market leader in providing simulation services to the pharmaceutical industry and has solid financials.

This article focuses on three companies that have carved out a special niche in the simulation industry; Ansys Inc. (NASDAQ:ANSS), GSE Systems (NYSEMKT:GVP) and Simulations Plus (NASDAQ:SLP) The simulation industry provides design solutions for almost every industry by imitating actual processes with software tools; providing cost savings, the ability to bring a product to market quicker, as well as facility in evaluating multiple variables to develop innovative solutions.

We are experiencing global increased demand for technology products. As technology becomes increasingly complex, the demand for simulation increases. According to a recent Aberdeen study, companies applying simulation tools are 50% more likely to experience cost reduction, 37% more likely to reduce development time and 24% more likely to meet launch dates. A study by CIM Data suggests that simulation has penetrated only about 10% of the target market and forecasts steady growth:

Cimdata.jpg

Ansys Inc. is the largest player in the simulation industry with over 45,000 customers including most of the world's largest 100 companies. Although about 20% of its revenue is derived from the technology industry, Ansys' customer base is well diversified with most of the remaining revenue distributed among 11 other industries. Ansys is not regionally dependent on any one area as its customers are fairly equally distributed throughout the planet.

The company has consistently recorded profit margins just under 90%. Revenues have grown 13x over the last 15 years. ANSS has proven to be a top notch enterprise, but the share price is currently at about the same price it was a year ago.

stock chart

Five of the nine analysts offering coverage have a hold rating and some research firms such as S & P Capital IQ have a sell rating on the stock. ANSS has 70% recurring revenues, making earnings forecasting more reliable. This a quality company that has seen its share price get ahead of its earnings growth. I am going to review the financials to gauge if this is a good entry point or if its worthwhile to wait before considering establishing a position. More background information and company description, can be found here where you will find my previous article on ANSS as well as articles by other SA contributors.

GROSS PROFIT MARGIN
2013 2014 2015 MRQ

TOTAL PROFIT/

TOTAL REVENUE

715/861 783/936 796/943 215/252
GROSS PROFIT MARGIN % 83 84 84 85
Click to enlarge

INCOME STATEMENT DEDUCTIONS

R & D 169 159 151 72
INTEREST 3 8 3 0
Click to enlarge
ANNUAL SUMMARY DATA
YEAR SALES NET INCOME EPS
2011 691 181 1.91
2012 798 203 2.14
2013 865 241 2.58
2014 936 255 2.70
2015 942 253 2.76
GROWTH RATES 8% 9% 10%
Click to enlarge

The above tables reveal that:

  • total profit has grown in proportion to revenue improvement.
  • Gross profit margin has remained consistent and at a very high rate.
  • R&D expenses have remained consistent.
  • Debt payments are negligible.

Net income for 2015 was negatively impacted by currency exchange rates.

The table below illustrates that total assets, total liabilities and shareholders equity have remained relative unchanged while the company has been undergoing a share buyback program throughout this same period of time, which results in improved EPS as demonstrated above but also improvements in ROE and ROA ratios. Another positive from the balance sheet is the steady growth in retained earnings.

BALANCE SHEET HIGHLIGHTS
2013 2014 2015
TOTAL ASSETS 2722 2752 2729
TOTAL LIABILITIES 440 465 484
SHAREHOLDERS EQUITY 2136 2218 2194
RETAINED EARNINGS 1285 1540 1792
Click to enlarge

A quick look at the cash flow statement indicates the amount spent on the stock buyback program each year and reveals a major reason why this company has a major advantage over other companies; capital expenditures and depreciating assets are almost negligible, which has allowed ANSS to add to its retained earnings while undergoing an aggressive acquisition program without incurring debt.

The current PE is 32 and about equal to its historic 5 year average PE. The forward PE is 22. The currency headwind has blown by. The financials reveal a quality stock that is worthy of investment consideration regardless of the overall market conditions and I rate ANSS a buy worthy of long term hold. Potential firepower is being created by the increasing short position. The previous time the short position reached this level was in Sept. and the subsequent short covering resulted in a new 52 week high, as illustrated in the chart above. I wouldn't wait until all of the analysts offering coverage upgrade ANSS.

GSE Systems provides simulation services to the energy industry with a primary focus on nuclear energy. In my previous article on GVP, I based my bullishness on this stock on the resurgence of nuclear energy. The same idea is still in play.

The stock price has exploded since my article was published:

stock chart

Insiders have continued to increase their holdings from 17% at the time of my original article to currently over 40% of the float. China is still on course to double their nuclear energy production, the U.S. hasn't changed plans to update its nuclear power plants and Japan has reopened nuclear energy production for the first time since the Fukushima disaster. GVP enjoyed its first profitable quarter as well as a reported a 60% increase in backlog due to US demand.

This company had not been profitable in years, so a review of their past financials will not be rewarding. There's a new management team on board and they are off to a good start on capitalizing on the renewed interest in nuclear energy. GVP has provided more simulation services to the nuclear energy industry than all competitors combined. I expect that GVP will continue to build on their new found success.

Simulations Plus provides simulation services mostly for the drug development industry. You will find my previous articles on this stock along with articles by Brendan Rose here. I think there's enough background information contained in those articles. In this article, I want to concentrate on the financial information to see how this stock measures up.

A quick glance at the chart demonstrates that the stock price was at a 52 week high and sold off perhaps due to a negative report from Street Sweeper. On a technical analyses viewpoint, the stock price had risen too rapidly and the sell off went to support at the 200 day moving average.

Simulations Plus, Inc. stock chart

The fundamentals reveal that SLP is unburdened by debt and has low and very consistent R & D expenses. The company has consistently reported a high gross profit margin, although year to year, the rate has been declining slightly. A good sign that this trend may be reversing comes from the just released 2016 2Q report with higher gross margins than for the comparable period for the prior year.

INCOME STATEMENT DEDUCTIONS

2013 2014 2015 MRQ

R & D/REV %

INTEREST/REV %

8

0

8

0

7

0

7

0

Click to enlarge
GROSS PROFIT MARGIN
TOTAL PROFIT 8424 9832 13998 392
TOTAL REVENUE 10071 11461 18314 516
GROSS PROFIT MARGIN % 84 81 78 76
Click to enlarge

ANNUAL SUMMARY DATA

SALES NET INCOME EPS
08/2011 8.74 2.71 .17
08/2012 9.45 3.03 .18
08/2013 10.07 2.89 .18
08/2014 11.46 3.03 .18
08/2015 18.31 3.84 .23
GROWTH RATE % 20.32 9.08 7.05
Click to enlarge
BALANCE SHEET HIGHLIGHTS
2013 2014 2015
TOTAL ASSETS 16063 20981 27344
TOTAL LIABILITIES 1821 5545 7812
SHAREHOLDER EQUITY 14242 15435 19532
RETAINED EARNINGS 9395 9345 9812
Click to enlarge

Sales growth has outpaced net revenue growth which has outpaced EPS growth. A more favorable outcome would be to see all three grow at similar rates. SLP hasn't done any financial engineering such as a share buyback that would boost the EPS numbers. The quality of earnings going forward is expected to be boosted by capitalizing cross selling opportunities from recent acquisitions. Growth in shareholder's equity is very positive.

The balance sheet shows that liabilities have increased at a higher rate than assets due to the recent acquisition of Cognigen. SLP reported that it currently has over $8 million in cash and will pay out a $1.4 million royalty payment this year as part of the acquisition cost. Retained earnings haven't grown, but the shareholder is being rewarded with a dividend that exceeds 2%. The balance sheet remains pristine.

Cash flow is also very positive as depreciating assets are minimal and there isn't any capital expenditure, allowing management to use cash flow for acquisitions and to support the dividend.

SLP trades at high valuations. The current PE is 34 compared to its 5 year average PE of 28 and the average S & P PE of 19. Investors may have been spooked by declining margins, that the EPS growth rate has been lower than the revenue growth rate, or perhaps that the stock price had risen too fast. Short interest has grown to 600% over the last two months. Based on projected earnings, the forward PE is 25 indicating that SLP is selling at a 12% discount to its forward PE. It might take a few Qs to work out the kinks and stabilize the effects of the recent acquisition, but SLP has put up super numbers and isn't showing any signs of deterioration. The short position is a potential positive as positions are closed out.

Conclusion: Simulation is in its infancy. The three companies in this article are poised to capitalize from the growth in opportunities within their respective niches. These are small caps and may be more volatile than large cap stocks. Please do your own due diligence prior to making an investment decision.

Disclosure: I am/we are long SLP, ANSS, GVP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.