There’s a comeback stock, of sorts, on the list of names that the GuruFocus gurus have been buying. Autodesk Inc. (ADSK, Financial) turned up in a high position on the S&P 500 Screener, which shows what the gurus have been buying and selling. Specifically, it is high on the list of net buys, which is to say more gurus have been buying than selling.
The comeback involves an earnings profile that looks like this:
That big dip was a result of the company making a significant change in its business model. Over the course of several years in the past decade, it moved its subscribers from “maintenance” plans to “subscription-only” plans (maintenance means perpetual licenses and customers pay for upgrades; subscription-only means cloud-based or downloadable software licenses bought and renewed for fixed terms).
The company explained this would have an effect on its reporting: “During our transition, revenue, billings, gross margin, operating margin, net income (loss), earnings (loss) per share, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front and as new offerings bring a wider variety of price points.” Presumably, “ratably” refers to pro-rated.
The transition pushed its GAAP and non-GAAP earnings per share figures into the negative column for several years. However, that transition ended in fiscal 2020 (for the year ended on Jan. 31).
As for the company itself, Autodesk described itself this way in its 10-K for fiscal 2020: “A global leader in design software and services, offering customers productive business solutions through powerful technology products and services. We serve customers in the architecture, engineering and construction; manufacturing; and digital media, consumer, and entertainment industries.”
In its Investor Overview presentation from February 2020, it provided this visualization of its markets and their contributions to revenue:
Turning to the gurus, this chart of their buy and sell transactions appears to show they are responding, above all, to its recently depressed price. As the price came down (shown on the black line), their net purchases jumped:
Twelve of the gurus currently hold positions in Autodesk. The largest of them are Steve Mandel (Trades, Portfolio) of Lone Pine Capital with just over 4 million shares, Ken Fisher (Trades, Portfolio) of Fisher Asset Management with 530,000 shares and Pioneer Investments (Trades, Portfolio) with 417,000 shares.
Combining charts for earnings per share, free cash flow and the stock price, we see more reasons to buy Autodesk at this time:
Perhaps that’s enough positive news to justify overlooking mediocre financial strength and profitability ratings. The first is pulled down, in part, by the company’s debt load:
Autodesk began using debt in 2012, at a low level; in 2017 and 2018 it had negative leverage; then, in 2019, its debt shot up to $20 billion before falling back to $5.3 billion early this year.
The financial strength rating will also be pulled down by the relationship between return on invested capital and the weighted average cost of capital, as shown at the bottom of the table above. When the WACC line (orange) is longer than the ROIC line (green), then the company is paying more for its capital than it is able to generate in returns from that capital. Presumably, this will shift as the company’s reported numbers normalize.
Interest coverage, at 6.36, means the company has enough cash and cash equivalents on hand to cover the interest costs on its debts.
There are also a couple of strong positives in the table. First, its Piotroski F-Score is 8, just one notch below the top; this rating summarizes what many value investors look for in a stock, and stocks with scores between 7 and 9 should outperform the market in coming years.
Autodesk’s Altman Z-Score is also strong, indicating there is little danger it will end up in bankruptcy.
Turning to the profitability side of the business, we have this table:
Again, the ratings are generally mediocre, starting with the overall score of 6 out of 10. The operating margin is barely in the double digits and the net margin is in single digits.
Normally, we would see a rating for return on equity in this table, but because Autodesk’s earnings have been unpredictable in the past few years, they are not available here.
Turning again to positives, note that the company’s shift to a subscription-only service should help protect it from short-term revenue dips. When it reports on the second quarter, we might expect fewer new subscription sales, but I suspect if that happens it will be a matter of deferrals rather than rejections.
If there are any dips in revenue, the company should be able to handle them comfortably. As of Jan. 31, it had $1.775 billion in cash and cash equivalents, which is up considerably over Jan. 31, 2019, when it had $956 million available. Long-term debt is $1.635 billion.
Looking forward three years, the company had this forecast for annualized recurring revenue in its investor presentation (prepared before Covid-19 became a force):
As noted, this forecast was generated before Covid-19, but given the type of business involved, could stay on track.
Conclusion
I’ve called Autodesk a comeback story—of sorts—not because it had climbed out of bad situation, but because it has successfully made its way through a major transition in its business model.
By getting away from the maintenance approach, with its perpetual licenses and occasional payments for upgrades and moving to a subscription plan, it makes future revenue smoother and more predictable. It lessens uncertainty about future revenue, making it possible for investors to more easily analyze its prospects.
No doubt the gurus included this in their assessments, but the currently depressed share price may have been the variable that led them to buy Autodesk in recent weeks.
Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.
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