Simulations Plus (NASDAQ:SLP) is my favorite buy-it-and-close-your-eyes-for-a-decade company, as I explained last week. They make software that helps scientists develop new drugs. It's at the intersection of biology and machine learning, the two fields most likely to revolutionize the world within my lifetime.
And it's a serious company. They've been growing for decade straight, both their software and consulting sales are increasing ~15% per year still, they've got a dominant product used by 19 out of the 20 drug companies and most of the world's versions of the FDA's, and their after-tax profit margins are ~25%.
At 30x (clean) forward EPS it's not cheap but with such potential on the upside, and the downside protected by fat margined recurring revenue, it's a bet I'm excited to take.
Yesterday StreetSweeper, which specializes in short side research, recommended investors sell SLP. They gave 10 arguments against the company; we can agree to disagree on those.
But their 11th was an absurd personal attack on me. With out any evidence they accuse me of promoting SLP under a pseudonym!
When I first read this I happened to be babysitting my very whiny infant while my very tired wife took a nap. I got to stew for an hour or so before I could comment on this slander that was linked to by Seeking Alpha. I apologize if my initial responses weren't very polite.
Anyhow, let's get to the meat. I'll be brief because I can be - SLP is a squeaky clean operation, and that's easy to show.
1) Simulations Plus has $4.8m in goodwill on its balance sheet. That's just 3% of their market cap. It originated from their only recent acquisition, a tiny strategic thing that has performed spectacularly. The goodwill is immaterial and safe. Moving on.
2) SLP capitalized $1.15 in software R&D in 2015. And they amortized $1.02m in previously capitalized expense. So if SLP's accounting was different - if they expensed everything right away - their operating income would've been lower by $0.13m, immaterial.
3) SLP's receivables popped last quarter, but they've never not been paid by a customer, and receivables have always wiggled with timing of license renewals, i.e. if a big customer renews a day before the quarter ends receivables pop. Their big customers are big pharma - I'm not worried.
4) SLP owes ~$3.6m to two parties, the former owners of the company they acquired, and a software company whom they bought a perpetual license from. StreetSweeper calls this revelation "shocking" but fails to explain why. SLP has plenty of cash; pays healthy dividend; and as I've explained their earnings are super predictable due to ~95% license renewal rates, ~40% pre-tax margins, and high trend growth. They'll earn ~$5m this year.
5) Cash flow plunges! SLP is burning cash! This is just point #3 about receivables recycled.
6) SLP's auditor isn't well known. Well I agree with them here that when you already have reason to suspect a company is corrupt that the auditor's identity is a crucial piece of evidence. I learned that from Melissa Davis who used to run StreetSweeper back when they were doing high quality deep dives. But I also learned that fraud (or devious accounting) presents as a syndrome. A cough by itself doesn't indicate lung cancer.
7) StreetSweeper doesn't think SLP is run by competent people. If you're going to click on any link in this piece, make it this one.
As a 12-year-old in western New York, Walt Woltosz learned Morse code to obtain a ham radio license; its dots and dashes communicated without speech. In adulthood, Woltosz made it his mission to help physically disabled people generate words they could not speak. University of Cambridge Professor Stephen Hawking gives lectures on astrophysics using technology Woltosz developed. Hawking's fame means many of us have heard Woltosz's "Words+ Equalizer," though perhaps we had not heard of it. (Hawking wrote A Brief History of Time using the system.)
8) Woltosz makes $180k base for spending only 60% of his time on the job. Well, even if that 60% figure is true, so what? That's a full time equivalent of $300k. Ask long-term shareholders whether he's earned it. Second, they joke on the conference calls about having to pry this guy away from the company. He spends his time on the road doing new product development for SLP nowadays. I think the odds that he actually spends ~24 hours per week working for SLP are slim.
9) Woltosz sold some stock recently for the first time in years. He still owns 40% of the company he founded. He's 70. The stock has done well. Next.
10) Institutions aren't buying SLP stock. So it is still undiscovered I suppose.
11) StreetSweeper finishes strong:
Using an assumed name, an author wrote a vague, initially somewhat entertaining, yet difficult-to-understand piece for Seeking Alpha that primarily says the author feels the company should live up to its outlandish P/E - which exceeds that of heavyweight companies.
The author they accuse of promoting SLP under an "assumed name" is me. On 2/8 I went to the Yahoo Finance SLP board and told folks I intended to write SLP up for Seeking Alpha. I asked for questions and discussion - I like to brainstorm (unfortunately the board is nearly empty). My yahoo moniker is bjr03001 and I signed off "brendan rose" so that the yahoo folks could check out my work on Seeking Alpha, which tends to be long-horizon value investing. On Yahoo I spend time on various message boards brainstorming about the companies I write up on Seeking Alpha.
All of this was easy to verify, so I have no idea where they got the idea I was a promoter operating under a pseudonym. That they assert this as fact is absurd.
I emailed StreetSweeper yesterday asking them to correct their mistake but have not yet heard back.
Disclosure: I am/we are long SLP.
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.