J.P. Morgan’s Software team is flip-flopping some names under their coverage this morning:
– ADSK, ROVI get upgraded to Overweight while VRSN and DOX are cut to Neutral.
I want to focus on Autodesk (NASDAQ:ADSK). JPM is upgrading the name to Overweight from Neutral with a $40 price target.
According to the firm, ADSK is one of the best franchises in their coverage. It has a substantial market share in a couple of key industry segments (AEC and Infrastructure) and is very competitive in manufacturing design software. The business is highly cyclical and they missed two other good entry points during the downturn in February of 2009 and July of 2010. They believe investors should take advantage of the cyclical pullbacks to build positions in what they consider a high quality software franchise. In addition, this next cycle has the potential added benefit of a move into product suites, a strategy that has helped companies like Adobe breathe large new growth opportunities into its business and something they think could underpin at least a 12% top line CAGR for ADSK over the next five years.
The details (in short):
Move to suites should provide at least 12% CAGR over 5 year horizon
Over the years we have watched a couple of software companies move from offering just point products to bundles of products to ultimately product suites that tightly integrate solutions and at attractive combined pricing. The first most notable company to follow this strategy is Microsoft with the Office suite, but we believe the best comparison for Autodesk is Adobe and its move to suites.
We went back and looked at the penetration rates of suites for Adobe and the impact on revenue and applied this to Autodesk. Result is that we see a base of 12% revenue CAGR over the next five years. Reason we say a base is that we lack perfect insight into the user base at Autodesk for products like Revit where we think there is potential to add another 3-4% to the revenue growth. But we think this view of Autodesk suite opportunity is very interesting given it is based on another software company with a very loyal customer base in Adobe.
Recent market action sets a range in our mind where the stock we think offers $12 of upside if the economy improves against the risk of $4-5 of downside if the economy worsens.
Notablecalls: JPM picked a (very) good day to upgrade ADSK as the August Architectural Billings Index (ABI) published last night showed a surprising jump.
The Architectural Billings Index (ABI) is a survey by the American Institute of Architects (AIA) and is viewed as a leading indicator of nonresidential construction activity. A score of 50 or above indicates an increase in billings. The AIA believes the index has a correlation with nonresidential construction spending 9-12 months into the future.
ADSK is one of the leading providers of software used by architects and engineers. If AutoCAD means anything to you, you’re on the right tracks.
In a bit of a shocker, the ABI spiked higher in Aug. The index jumped 6.3 pts from 45.1 to 51.4. That’s the biggest m/m change in 5 years (Aug ’06). “Based on the poor economic conditions over the last several months, this turnaround in demand for design services is a surprise,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Many firms are still struggling, and continue to report that clients are having difficulty getting financing for viable projects, but it’s possible we’ve reached the bottom of the down cycle.”
Here’s an illustration from Morgan Stanley explaining why ADSK shareholders track the ABI index:
So there you have it. JPM upgrade and an explosive move in the ABI index should get ADSK moving. The stock should trade towards $30 level in the n-t, possibly surpassing it if the tape holds.
Let’s see how it goes. I’m going to call this one Actionable Call Alert!
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