Simulations Plus: Has Fantastic Total Return And Growth In The Drug Simulation Testing Market

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About: Simulations Plus, Inc. (SLP), Includes: BA, DLR, EOS, HD, HPQ, JNJ, LMT, MDLZ, O
by: William Stamm
Summary

Simulations Plus total return overperformed the Dow average for my 51-month test period by 217.10% which is fantastic.

Simulations Plus three-year past CAGR of 24% is well above average and will give you great growth with the increasing need for testing new drugs faster than before.

Simulations Plus has increased its dividend for three of the last six years with a present 1.2% below average yield but has a great innovative product for growth.

This article is about Simulations Plus (SLP) and why it's a choice for the speculative growth investor looking for the latest technology in drug development. Simulations Plus is a provider of simulation and modeling software for pharmaceutical product development in the United States and foreign countries. What interested me in this company was its product but most of all the high insider ownership of 31%.

Simulations Plus is being reviewed using The Good Business Portfolio guidelines, but some of my guidelines are not germane for a small-cap company like SLP. The company has cash it uses to increase capacity and develop new products.

When I scanned the five-year chart, Simulations Plus has a great chart going up and to the right in a very good slope.

Chart Data by YCharts

Fundamentals of Simulations Plus will be reviewed on the following topics below.

  • The Good Business Portfolio Guidelines
  • Total Return And Yearly Dividend
  • Last Quarter's Earnings
  • Company Business
  • Takeaways
  • Recent Portfolio Changes

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update to Guidelines, August 2018". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.

Good Business Portfolio Guidelines

Simulations Plus passes 9 of 11 Good Business Portfolio Guidelines, a moderate score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.

  1. Simulations Plus does not meet my dividend guideline of having dividends increase for 8 of the last ten years and having a yield of at least 1%, failing this guideline with dividend increases for 3 of the last six years. The recent earnings payout ratio is moderate at 48%. After paying the dividend, this leaves cash remaining for investment in expanding the business.
  2. I have a capitalization guideline where the capitalization must be greater than $7 Billion. SLP fails that guideline. Simulations Plus is a small-cap company with a capitalization of $370 Million. The Simulations Plus cash flow of $6.8 Million gives it the ability to increase the business going forward.
  3. I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 7%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2% plus an inflation cushion of 1.8%. The three-year past CAGR (S&P CFRA) of 24% strongly meets my requirement of 7% with growth projected going forward.
  4. My total return guideline is that total return must be greater than the Dow's total return over my test period. SLP passes this guideline with a fantastic total return of 259.19%, much more than the Dow's total return of 42.09% over my test period. Looking back five years, $10,000 invested five years ago would now be worth over $41,200 today. This great total return makes Simulations Plus a fantastic investment for the total return investor looking back with growth to continue going forward.
  5. One of my guidelines is that the S&P rating must be three stars or better. SLP's S&P CFRA rating is three stars or hold with a calculated one-year target price of $26, passing the guideline. SLP's price is presently 30% below the target. SLP is under the target price at present and has a high PE of 38, making SLP a good buy at this entry point if you consider the high growth rate the company has achieved for the past few years.
  6. One of my guidelines is would I buy the whole company if I could? The answer is yes. The past total return is fantastic, and the renewal rate and new customers for their products are increasing in a business sector that needs to make the drug development process shorter. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and also generates a fair income stream. Most of all what makes SLP interesting is the great growth rate in a new technology that is helping develop new drugs faster. It's also interesting that 31% of the shares are held by insiders.

Total Return And Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Simulations Plus total return is strongly positive compared to the Dow baseline in my 51-month test. I chose the 51-month test period (starting January 1, 2015, and ending to-date) because it includes the great year of 2017 and other years that had fair and bad performance. The great total return of 259.19% makes Simulations Plus a great investment for the total return investor. SLP has a below average dividend yield of 1.2%, but who cares with the great growth in the company revenues and earnings long term. The Dividend was last increased in November 2017 to $0.06/Qtr. from $0.05/Qtr. or a 20% increase.

Dow's 51-month total return baseline is 42.09%.

Company name

51-month total return

The difference from Dow baseline

Dividend yield

Simulations Plus

259.19%

+217.10%

1.2%

Last Quarter's Earnings

For the last quarter on January 9, 2019, Simulations Plus reported earnings that missed expectation by $0.02 at $0.09 compared to last year at $0.10. Total revenue was higher at $7.54 Million, more than a year ago by 6.6% and beat expected revenue by $0.09 Million. This was a mixed report with bottom line missing expectation and the top line increasing and having a good increase compared with last year. The next earnings report will be out April 2019 and is estimated to be $0.13 compared to last year at $0.11, a good increase.

Business Overview

Simulations Plus provides simulation and modeling software for the pharmaceutical industry in the United States and foreign countries.

As per Reuters:

Simulations Plus, Inc. is a provider of simulation and modeling software for pharmaceutical discovery and development.

The Company offers its products and services through two business units, including Simulations Plus, Inc. and Cognigen Corporation.

The Company also provides consulting services ranging from early drug discovery through preclinical and clinical trial data analysis and reporting to regulatory agencies.

The Company offers over seven software products for pharmaceutical research and development, including three simulation programs that provide time-dependent results-based on solving various sets of differential equations.

The company distributes its products and offers its services in North America, South America, Europe, Japan, Australia, New Zealand, India, Singapore and the People's Republic of China."

Overall, Simulations Plus is a good business with 24% CAGR past growth as the worldwide economy grows going forward with the increasing need for more drug-related products and a faster time to develop and get them to market. The revenue growth provides SLP the capability to continue its growth as the need for faster drug development is needed as they add new customers worldwide each quarter.

The Fed has kept interest rates low for some years, and on December 19, 2018, they raised the base rate of 0.25%, which was expected. I believe that they will go slow in 2019, which should help keep the economy on a growth path. If infrastructure spending can be increased, this will even increase the United States growth going forward with better economics for the consumer. The Fed lowered GDP projection for 2019 which may mean they are getting to neutral on the economy, projecting two rate increases for 2019. The recent volatility may keep the Fed on hold. At the Fed meeting in January, the statement was a wait and see and a bit more dovish than the last meeting.

From January 9, 2017, earnings call Shawn O'Connor (Chief Executive Officer) said:

This was a strong start to what we expect to be another record year for Simulations Plus. We continued our long tradition of profitable growth and returning capital to shareholders. We delivered a record $7.5 million in revenue for the first quarter, up 6.6% compared to the same quarter in the prior fiscal year.

Our software revenue growth was strong for the quarter at 10%, versus the same period last year. Our consulting revenues were up 3% for the quarter compared to last year, constrained by resource capacity and two key project initiatives that slipped out of the quarter. Overall, our 6.6% revenue growth in the first quarter of 2019 is in line with our historical annual revenue growth in the 10% to 15% range on an annual basis.

I spoke last quarter of the challenge in meeting the services demand with the growth of our consulting resources to deliver on these opportunities. We have grown staff 9% year-over-year, and during the quarter brought onboard new staff as well, that new staff historically have a ramp-up time before they become fully billable, and our margins reflected that this quarter, and we continue to seek additional qualified staff to support this side of our business.

Software renewal rates followed strong historical trends, at 84% of accounts, and 94% of fees. We continue to enjoy excellent long-term relationships with our customers and benefit from very low churn rates as a result. New license units for the quarter were 210, up 6% year-over-year.

We added seven new commercial companies and 20 nonprofit groups this quarter, a new customer meaning either a new company or a completely new geographical division of a current customer. We ended the quarter with a headcount of 40 at Lancaster."

This shows the feelings of top management for the continued growth of the Simulations Plus business and shareholder return with an increase in future growth. SLP has good growth going forward and will continue as the world need for faster drug approvals grows.

Takeaways

Simulations Plus is a great investment choice for the growth investor with its above-average total return. Simulations Plus is 0.45% of The Good Business Portfolio (My IRA account) and will be added too if cash is available. I am normally not a buyer of small companies, but the forward potential of this company and the fact that insiders own 31% of the company makes me a buyer of this innovative technology software company in the drug business.

Recent Portfolio Changes

I intend to watch the earnings reports for the companies in the portfolio and may finally decide to trim my high flyers that are over 8% of the portfolio, so I can invest in good companies on my buy list.

  • On March 7, added to position of Simulations Plus from 0.33% of the portfolio to 0.45%. I will add slowly to this position as available cash allows.
  • On March 4, trimmed position of Hewlett Packard (HPQ) from 1.3% of the portfolio to 1.0%. The last earnings report was poor and future growth looks weak at 2%, time to sell HPQ for a better business.
  • On February 28, trimmed position of Boeing (BA) from 16.1% of the portfolio to 15.8%. I love Boeing but you have to have diversification.
  • On February 2, increased position of Realty Income Corp. (O) to 0.7% of the portfolio, I could use a bit more steady monthly income.
  • On January 30, increased the position of Simulations Plus from 0.2% of the portfolio to 0.4%. I think its product may be the product of the future for drug testing.
  • On January 28, bought a starter position of Realty Income Corp., I could use a bit more steady income and hope to add to this holding in the future. Realty Income Corp. is now 0.4% of the portfolio.
  • On January 28, sold the remaining portion of Mondelez (MDLZ). The forward growth does not look good enough.
  • On January 24, increased the position of Digital Realty Trust (DLR) from 3.1% of the portfolio to 3.6%. I want to get DLR up to a full position of 4%.
  • On January 16, sold the remaining shares of 3M (MMM). I decided to sell this small position in order to reduce the number of positions with a new target number of 20 positions max from 25.
  • On January 11, started a new position in Lockheed (LMT) at 0.65% of the portfolio.
  • On January 9, trimmed Mondelez from 1.32% of the portfolio to 0.64%. The growth rate looks low going forward and the portfolio is looking at Lockheed as a replacement.

The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in the portfolio are: Johnson & Johnson (JNJ) which is 8.0% of the portfolio; Eaton Vance Enhanced Equity Income Fund II, (EOS) 8.0% of the portfolio; Home Depot (HD), 8.8% of the portfolio; and Boeing, 15.8% of the portfolio. Therefore, BA, EOS, JNJ, and HD are now in trim position, but I am letting them run a bit since they are great companies.

Boeing is going to be pressed to 16% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The first quarter earnings for 2018 were unbelievable at $3.64 compared to expectation of $2.64. Farnborough Air Show sales in dollar value just beat out Airbus (OTCPK:EADSF) by about $6 Billion and both companies had a great number of orders. Boeing received an order for 18 more KC-46A planes. The second quarter 2018 earnings beat expectations by $0.06 at $3.33, but a good report was hurt by a write-off expense on the KC-46 which has started delivery in 2019. Two KC-46A tankers were delivered in January 2019. As a result of the good fourth-quarter earnings, S&P CFRA raised the one-year price target to $500 for a possible 20% upside potential.

JNJ will be pressed to 9% of the portfolio because of its defensive nature in this post-Brexit world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did nothing. JNJ has an estimated dividend increase to $0.97/Qtr. in April 2019, which will be 57 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.

For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2018 4th Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real-time follower and you will get each quarter's performance after the next earnings season is over.

Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, ADP, EOS, SLP, LMT. 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.

Additional disclosure: Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.