Moldflow Breaks the Mold with International Growth

Moldflow (MFLO) was initiated as a new position in the portfolio last week. Moldflow designs, manufactures and markets computer software solutions for the design of injection molded plastic parts. The company was incorporated in 1997 and has a client list that includes many of the largest players in global industries. A sample list of clients includes 3M, Honeywell, Toyota, GM, Honda, Hitachi and many other large organizations.

The company has a global client base with over 6000 sites across the globe spread out over 70 countries. In the company's most recent quarter, revenue totaled $17 million which was a 19% increase over the prior year for continuing operations. The company's revenues have predominantly been foreign-based with the composition at 47% Asia/Australia, 38% Europe and 15% in the Americas. The company expects much of its future growth to be centered in emerging markets, especially in Latin America as and to continue growth in Asia. In the most recent quarter, the highest growth was found in Asia, where revenues grew 28%, primarily in the electronics sector with companies such as Mitsubishi, Hitachi and Samsung.

In mid-2007, Moldflow disposed of its manufacturing solutions business which had been struggling for $7+ million in cash. This move should result in less lumpy operating results going forward. The company's revenue is split between product and services revenue with product revenues slightly larger historically. The product revenues represent recurring license fees for its, software, while the service revenue represents maintenance and support contracts.

The company currently has less than 10% market share of the plastic CAE market, which gives the company substantial opportunity for growth going forward. The sale of plastics continues to increase rapidly, and plastics are becoming a larger part of everyday products (an example given by the company is in the automobile market where plastics will increase from 13% to 20% of the composition).

The company has a strong balance sheet with $81 million in cash (nearly $7/share) and marketable investments and no long term debt. I would like to see the company start to use the cash to increase their share buyback (they have an announced buyback still in affect), to pay dividends or to use for accretive acquisitions. The company has guided to 94 cents to 1.00 in earnings for the coming year, although based on my own financial models, I expect them to exceed even the high end of that range and likely come in closer to $1.02-$1.07 per share which gives the stock a enterprise value/earnings ratio of about 9.

Long term, the company expects significant operating margin improvements from the mid-teens to mid-to-high twenties with rapid global expansion. The company does have some degree of seasonality with results, so expect some variability from quarter to quarter. Going forward, over the next 3-5 years, my models are showing growth rates of revenue in the low to mid teens with EPS growth in the high teens to 20%. These numbers have the potential to go higher if the company increases share buybacks or to make accretive acquisitions, while a significant slowdown in the Asian market could negatively impact results.

Comments

[Dan Weiss]

It was just announced that Moldflow is to be acquired by Autodesk for $22/share. Although, I am happy with the gains from the stock I am of the opinion that the company is worth more than the acquisition price especially considering the international growth prospects especially in Asia and the low valuation.

[AlanBrochstein]

I hadn't read your article, Dan, but I too recently bought the stock and am disappointed with the price.