PTC Inc.: Power To Create

Apr. 25, 2022 11:56 AM ETPTC Inc. (PTC)ROK6 Comments

Summary

  • PTC is helping the physical world to transform into a digital world.
  • The long-term positioning of the business is sound, as these prospects have in the past been aggressively priced in by the market.
  • Shares have underperformed a bit over a long-term time period, which improves appeal here, yet valuations are still somewhat demanding here.
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Digitaal verbeterd schot van twee knappe zakenlieden die in het bureau werken dat over veelvoudige lijnen van computercode wordt overlappen

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PTC Inc. (NASDAQ:PTC) has a purpose shown in its name, which stands for power to create. The company believes that digital transforms physical, as its goal is to help (industrial) customers improve on their future prospects and results by providing a portfolio of innovative solutions to transform the production, engineering, and servicing of these products.

The Idea - The Promise

PTC believes heavily in the concept of digital transformation of the economy of the future, seen already in the fact that digital solutions define, manage, connect, augment and altogether disrupt physical operations. The company offers these solutions across two main segments.

Digital thread customers is the segment which focuses on solutions and products which are physical, large, mechanical and have long life cycles (think of cranes, trucks, buses and machinery). These are long-term projects with long-lasting implications. The velocity customers focus much more on smaller, tech-savvier, and shorter life-cycle products like watches, navigation equipment, etc.

In the meantime, the company itself is making a transition as well, like so many of these service businesses. It is a transition to becoming an SaaS play, at the expense of on-premise solutions and revenues.

The business has been around for a long time, and shares "enjoyed" the Internet bubble to trade around the $30 mark in 2015. From this point in time, shares came to life again amidst the SaaS transition, showing growth and rosier prospects, with shares trading towards the $100 mark in 2018. After some volatility surrounding the pandemic, shares rallied to a high of $150 in the summer of 2021, before now selling off to the $100 mark, trading recently at $99 to be precise.

Valuation Thoughts

With shares not having gained any ground over essentially five years in time, and the positioning more relevant than ever, it is interesting to establish an investment case here. The company has a fiscal year which ends in September, and for the year 2021, the company posted a 24% increase in sales to $1.81 billion, with more than 90% of sales generated from recurring or perpetual license revenues. The company is hugely profitable, as it posted GAAP operating profits of $380 million, even after a near-$30 million amortization charge.

The results were even more pronounced in the fourth quarter, as quarterly revenues of $480 million are at a run rate in excess of $1.9 billion already, with operating profits running around $460 million. With 20% tax rates, that works down to net earnings of close to $370 million, for earnings just north of $3 per share, at $3.15 per share to be more precise. With shares trading at $99, valuations are obviously still demanding despite the fact that shares have not gained any ground over the past couple of years. Net debt stood at $1.11 billion, which is very manageable with EBITDA trending at around the half a billion mark.

The 2022 guidance looks reasonable, with revenues seen up 2-9% to $1.850-$1.975 billion. While no earnings guidance was given, valuations remain demanding at 31 times trailing realistic earnings here.

Since the release of the 2021 results, it has been relatively quiet on the corporate front. Towards the end of the year, the company (and its investors) denied that Rockwell Automation (ROK) was cutting its 9% stake in PTC.

In January, the company announced its first quarter results, as the company hiked the lower end of the sales guidance by $20 million, yet flattish margins were not too inspiring. In April, the company announced a slightly larger deal as it reached a deal to acquire Intland Software for $280 million, adding the Codebeamer application lifecycle management software play to its line-up.

The German-based business is set to increase exposure to automotive, life science, electronics, aerospace, and defense industries. With a current $13 billion enterprise valuation, the deal is really a bolt-on deal which is equal to just over 2% of the enterprise valuation, albeit that no financial details on Intland have been reported.

What Now?

Truth be told is that PTC looks fair to fully valued here, despite the sound positioning and the long term share price underperformance. Based on realistic earnings, PTC commands a >30 times earnings multiple which is high in this unforgiving environment, in which higher interest rates create a rotation from growth to value.

While the bolt-on deal and long term secular positioning make PTC likely an interesting long term investment case, at more realistic valuations here, it is the strategic investment by Rockwell which has its pros and cons as well, based on the likelihood of PTC being involved with M&A itself (and by whom).

Right now I consider shares largely fairly valued here as some stronger organic performance would be required to genuinely improve the risk-reward here.

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