Simulation Industry Fund 1 Year Old And Much Richer

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Includes: ADSK, ANSS, AVEVF, BA, CAE, CDNS, DASTY, EXA, GVP, MSFT, RSTAY, SIEGY, SLP, SNPS, TRMB
by: Sergio Heiber
Summary

I created this fund one year ago to track the simulation industry.

The simulation industry has barely penetrated its addressable market and continues to enjoy strong growth.

There are no publicly traded simulation funds.

I found myself investing in simulation stocks and searched for a fund that covered this market segment. I don't believe there is such a fund, so in January 2017, I created one in this SA article. I added new stocks to the original fund in this article, which listed every pure play publicly traded simulation company that I could find. This article is an update which includes a review of the fund's performance, industry outlook and a review of each stock in the fund. Please note that the fund is made up of what I considered pure plays in simulation and does not include more diversified companies that are involved in this sector such as Microsoft (MSFT) or Boeing (BA).

Fund Performance

The original portfolio consisted of Ansys (ANSS), Simulations Plus (SLP), GSE Systems (GVP), Rib Software (OTCPK:RSTAY), Exa Corporation (EXA), and CAE Inc. (CAE). Dassault (OTCPK:DASTY) was added in July.

$ when included Current $ Change
ANSS 93.94 163.65 74%
SLP 10.00 16.65 67%
GVP 3.15 3.26 -----
RSTAY 24.85 67.82 103%
EXA 14.00 24.25 71%
CAE 14.03 18.46 32%
DASTY 88.00 114.57 31%
SIL FUND 54%
SPY 243 283 42%

Acquisitions of small simulation companies by larger companies continues as the industry consolidates. It was fortunate that we added DATSY in July as EXA was acquired by DASTY shortly thereafter. Other acquisitions since my July article include ANSS purchased Computation Engineering International, Lam Research (LRCH) picked up Conventer Inc. and Synopsys (SNPS) added QuantumWise.

Industry Outlook

Simulation has proven to save time and money as it continues to expand into new applications, creating various segments with different growth outlooks. A study by Technavio estimates a CAGR of 5% through 2021 for the global electronic design automation market and a CAGR of 12% for the global engineering and construction market. A study by IT Business Net was even more optimistic for this sector.

Growth in the EDA sector is being fueled by aerospace and defense spending by the world's major countries. The major players in this segment are Cadence Design Systems (CDNS), Synopsys and Siemens (OTCPK:SIEGY).

Growth in the engineering and construction market is due to demand for cloud based solutions which eliminate location restrictions and provide accessibility for all types of operating systems. Another key driver is 5D BIM -Building Information Modeling, as governments are legislating its use, recognizing the reduction in errors and time of construction as well as cost savings. Major leaders in this market segment include Autodesk (ADSK), Trimble (TRMB), and AVEVA (OTCPK:AVEVF).

ANSS

ANSS continues to confuse analysts. Case in point, last September a Wedbush analyst downgraded the stock after an analyst day presentation citing the stock as being fully valued. Who could blame the analyst? The stock price had been moving sideways for months and the stock carried lofty valuation numbers. The company has consistently beaten estimates and the stock price ended its hibernation with a strong run. Perhaps this run has something to do with the overall market, but ANSS has some powerful ingredients in its financials. There is no debt, consistent strong cash flow, high margins of nearly 50% and steady growth although at a rate of slightly less then 10%. This is the market leader in the simulation industry.

SLP

SLP is much smaller than ANSS but the model is similar. The stock sells at extremely high multiples but the company has a history of strong cash flow and enviable margins. A concern is that the company has been growing by acquiring companies whose products sell at lower margins. The overall margins have been only slightly reduced and remain enviably high. Shorts have had their scalp handed to them by this stock in the past as I mentioned in my July article. One SA contributor has indicated an interest in shorting SLP at this time and has an intention of providing an article with his reasoning. Perhaps, we can say here we go again.

GVP, RSTAY, CAE, DATSY

I wrote about GVP as it underwent restructuring a few years ago. The previous restructuring had a very favorable outcome on the stock price. The company is undergoing another restructuring at this time. Perhaps it is a good time to take a look. I plan on doing a write-up on this subject shortly.

I am also planning on doing a full article on RSTAY. This is a pure play on simulation but also on 5D BIM.

CAE is the market leader in a mature market segment and is attempting to gain market share in the growing health field. I plan on providing more detail on their progress in a future article.

DATSY is the market leader in bio-simulation and has a hand in many different areas. This company is on my list for a write-up as well.

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Disclosure: I am/we are long RSTAY, 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.