It’s been a while since I caught up PTC (PTC -0.89%) — Spring 2021 to be exact. Since then, computer-aided design (CAD) software manufacturers have done well, growing revenue and profitability at double-digit rates.
The only problem is that stock prices have plummeted after a surge of optimism about the Government Infrastructure Spending Bill, which will ultimately be a scaled back $1.2 trillion infrastructure investment and jobs bill.
Nonetheless, after over a decade of focus on asset lightening software, the company’s investments in fixed assets are here and may continue for years to come. After crashing for most of 2021, PTC stock ended 2022 flat and easily beat the market. If you’re looking for a way to buy a boom in infrastructure spending, PTC could be your industrial tech stock.
Help Wanted: AI and Automation
Following the US Infrastructure Act, government spending was also authorized through the Inflation Reduction Act and the CHIPS Act. What is considered “infrastructure” these days can be controversial, but these latest spending bills have ample funding aimed at manufacturing, industrial technology and energy. The demand for infrastructure upgrades is even more acute abroad.
However, in a tight labor market, many companies cannot fill many of the jobs they have. And with an economic downturn likely in 2023, many companies are starting to think about doing more with less. This is where companies like PTC can play a role.
PTC is a software subscription company that provides engineering, design, and product management in categories similar to CAD companies, such as: Autodesk (ADSK -0.66%) and simulation software expert Ansys (answer -0.81%). Some of PTC’s software products cover not only CAD basics, but also some high-tech initiatives such as industrial Internet of Things management, additive manufacturing (3D printing), and augmented reality software that you can use to increase worker productivity.
The common theme of all these solutions is to increase the efficiency of engineering, manufacturing and industrial businesses through artificial intelligence (AI) and automation. It’s a software suite that’s already doing pretty well.
For the recently closed fiscal year 2022, PTC reported organic growth of $1.56 billion, a 6% increase in annual recurring revenue (excluding small acquisitions). Excluding the impact of a record rise in the US dollar (due to the Fed’s massive rate hike), annualized recurring revenue would have increased by 16%.
However, despite headwinds, free cash flow grew 21% to $416 million in 2022 as PTC focused on realizing profitable expansion in its operations.
A rosy outlook beyond 2023
PTC has had a tremendous growth story over the past decade, growing its revenue at a CAGR of 15% while increasing its adjusted operating profit margin from 16% in 2010 to 38% in 2022. The coming year as computing technology begins to overhaul the industrial economy in earnest.
For fiscal year 2023, PTC expects annual recurring revenue to grow 10% to 14% (excluding exchange rates and the pending acquisition of software company ServiceMax). Free cash flow is projected to rise about 35% to $560 million as the company continues to cook its own and “do more with less.” In a more severe macroeconomic scenario (recession), PTC sees annual recurring revenue growing at 7% or flat through 2022. Not bad considering that cyclical industries and manufacturing sectors tend to be particularly hard hit by economic downturns. What is clear is that PTC’s services are in high demand.
As is the case with many software companies, PTC has stock-based compensation issues. Equity payments to employees reached up to $175 million last year. However, much of this was offset by a $125 million share buyback. Whether on an unadjusted net income or free cash flow basis, PTC is profitable and able to manage these non-cash expenses so they do not unduly dilute shareholders.
The stock trades at 46 times trailing 12-month earnings and 35 times trailing 12-month free cash flow. A steep premium, with PTC’s realized gains rebounding significantly in 2023 and double-digit earnings growth expected over the next several years. Based on this assumption (earnings-per-share growth of about 20% over the next two years, then settling into high single digits), we believe PTC is currently worth quite a bit.
Because of the premium price tag, we recommend cautioning against buying a position in one go. If you choose to buy, use the dollar cost averaging strategy to build your position over time. Nonetheless, I believe PTC can grow organically and deliver through future acquisitions. Keep an eye on this software technology provider as industrial technology and automation are likely to be major investment topics.
Nicholas Rossolillo has no positions in any of the stocks mentioned. His clients may own shares in the mentioned shares. The Motley Fool has a seat at Autodesk and recommends Autodesk. The Motley Fool recommends Ansys and PTC. The Motley Fool has a disclosure policy.