This engineering company is forecast to grow at an annual rate of 50.17% over the next five years.
Altair Engineering Inc. (ALTR)
From Cabot Stock of The Week
There is a renaissance underway in the industrial manufacturing industry that is changing how products are designed, built and introduced to market. The impacts are huge. McKinsey says this fourth industrial revolution, known as “Industry 4.0”, could drive an eight- to nine-times increase in GDP from established economies!
The foundation of Industry 4.0 is a concept called the Digital Twin. It’s kind of an abstract concept. But in simplest terms, a Digital Twin is a digital replica of a physical object. It can also be the digital representation of a process. It’s used in industries where physics really matter, like the automotive, aerospace and heavy equipment manufacturing sectors.
Companies are adopting the concept of the Digital Twin to build better products, save money, get products to market faster, improve maintenance schedules, tweak complex manufacturing processes, and more.
A Digital Twin involves many powerful technologies working together, including Computer Aided Design (CAD), Computer Aided Engineering (CAE), Machine Automation, Virtual Reality (VR), Augmented Reality (AR) and Internet of Things (IoT). Simulation is also a key technology, which is where today’s recommendation comes in.
Altair Engineering Inc (ALTR) is a $2.4 billion company that develops and sells computer-aided engineering (CAE) software. This simulation software helps manufacturing companies innovate across their entire product lifecycle, from concept design, to manufacturing, to in-service operation.
There are a huge variety of ways Altair’s simulation software is used. It is used to create 3D simulations when airplanes are designed, to design and test loads on helicopter rotor blades, and to help auto manufacturers make lighter cars without sacrificing structural integrity.
It’s a very compute-power intensive field. Many customers don’t have the resources in-house, so they turn to Altair, who can help them run simulations in the cloud by tapping into high-performance computing (HPC) infrastructure.
The company was founded in 1985, but didn’t go public until November 2017. One founder, James Scapa, is an engineer by training and began his career with Ford Motor Company in 1978. He is the current Chairman and CEO of Altair, which began as a small consulting operation in the CAE field.
Today, Altair has 71 offices in 24 countries. It generated $333 million in revenue last year (up 6%) and is on target to grow revenue by 15% in 2018 and 12% in 2019. Over 80% of revenue comes from software and related services, while roughly 14% comes from a force of embedded engineers that work with key customers to advance their Digital Twin initiatives. There is also a very small internal division that commercializes technologies.
Importantly, Altair is delivering profitable growth. EPS was $0.08 in the first quarter of 2018 and $0.05 in Q2. In 2018—Altair’s first full year a public company—EPS should be around $0.29, then grow by around 60%, to $0.48, in 2019.
Altair has tens of thousands of users across roughly 5,000 large manufacturing companies. It is particularly strong in the automotive, aerospace and heavy equipment markets. It counts 15 out of the top 15 auto manufacturers and 10 out of the top 10 aerospace companies as customers. Automotive now makes up around 40% of the business (down from 100% years ago) and management says demand remains high as autonomous and electric vehicles require powerful simulation software.
This is what the chart looks like.
The stock was strong right after it came public and has worked its way higher, finding consistent support at its 50-day line along the way. But as the market retreated in October, the stock retreated with it, falling below its 50-day line last week and finally finding support at 34, which is slightly above the stock’s 200-day line, and within the consolidation range of 33 to 36 that persisted through the month of July. I think this is a decent entry point for a little-known small-cap stock with solid growth prospects.
Timothy Lutts, Cabot Stock of the Week, www.cabotwealth.com, 978-745-5532, October 16, 2018