Polen Capital Management, LLC, an independently-owned global investment manager, recently published its first-quarter global growth commentary – a copy of which can be downloaded here. During the first quarter of 2020, the Polen Global Growth Model Portfolio returned -12.68% gross of fees, while the MSCI AllCountry World Index was down 21.36%.
In the said letter, Polen Capital highlighted a few stocks and Autodesk Inc. (NASDAQ:ADSK) is one of them. Autodesk engages in the design of software and services. Year-to-date, ADSK stock gained 0.8% and on April 28th it had a closing price of $177.31. Its market cap is of $40.5 billion. Here is what Polen Capital said:
“We also purchased a 2.0% position in Autodesk during the quarter. Autodesk’s software products have leading share in each of its three business segments—Architecture, Engineering and Construction (AEC), Manufacturing (MFG) and Media & Entertainment (M&E). Technology today is allowing some businesses to make a step-function change from good to great. Our most notable example is Adobe—as a dominant industry leader with customers completely reliant on their products, the company was able to transition to a subscription-based model. Autodesk is in the early stages of a near identical transition.
We see that the shift to a subscription-based model has widened the company’s moat and increased its quality when looking at a variety of metrics, such as margins, ROE/ROIC, earnings power, and free cash flow generation and recurring revenue, which has increased from 40% pre-transition to over 95% today. Due to the transition, we believe the business has operating leverage and is poised to unlock significant earnings power over the next 3-5 years—in line with Adobe’s achievements.
In addition to the company’s successful business model transition, the global construction industry is only just now hitting what we believe is a tipping point. Firms the world over are not only seeing the transition to digital products like Autodesk’s Revit—the world’s leading building information modeling (BIM) design tool—as more efficient but are realizing that they are becoming competitively disadvantaged by not using it. Some governments—like the U.K.— are even mandating that BIM be used to increase efficiency and decrease waste. Further, we believe that even if the construction and manufacturing sectors experience a slowdown resulting from coronavirus spread mitigation, Autodesk’s tools are too missioncritical to turn off.
While Autodesk carries an optically high price-to-earnings multiple of 33x next-twelve-months earnings, the business model transition has created a temporary mismatch between earnings and free cash flow. On a free cash flow basis, the company is trading at about 20x. We have been following Autodesk closely, patiently waiting for a more favorable price, and we believe the current uncertain environment has offered a good entry point. Autodesk is also geographically balanced, deriving roughly 70% of revenue from outside of the Americas, and its BIM software provides a tool to reduce significant waste in the construction industry, which we find appealing from an ESG perspective.”
In Q4 2019, the number of bullish hedge fund positions on ADSK stock increased by about 33% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
