Forget The Unicorns; This Is The Tech Company For Your Portfolio

Getting exposure to a great tech company doesn’t have to mean sacrificing strong financials. With AspenTech, you get both.

| More on:

When times get tough, companies cut back. They cut back on production, spending, and investment as sales decline and the future becomes uncertain. In these times, software that helps cut costs by identifying inefficiencies and has the ability to pay for itself can be extremely valuable. Aspen Techology (NASDAQ: AZPN) is the company that sells that software.

AspenTech provides a range of asset optimization software to capital-intensive companies in industries like energy and pharmaceuticals. Last month on their earnings call, CEO Antonio Pietri reported: “…customers are telling us that through the one or two saves that they achieved after they implement Mtell, they are recovering the cost of the investment.” Through Mtell and other products, AspenTech is helping their customers “optimiz[e] their assets to run safer, greener, longer, and faster.” This is probably why the company has attracted over 2,100 companies from numerous industries as customers.

Aspen Technology screen with price fluctuations

Image Source: Getty Images

This alone should lead investors to consider adding AspenTech to their portfolios. But hold up! There are lots of tech companies promising great things to customers while they pile up huge loses year after year for shareholders. Is AspenTech one of those companies?

The Financial Statements

The company’s income statement shows strong income with growing revenues and stable to improving margins compared to the last few years. Revenues for 2019 were up to almost $600 million from $520 million and $495 million in 2018 and 2017, respectively. During that time, gross profit margin remained stable at 90% while operating margin and earnings before tax margin improved in 2019 to 47% and 51%, respectively. Growth continued into the first quarter of fiscal year 2020 with income growing at every level relative to the first quarter of 2019.

In terms of the company’s ability to pay its obligations, AspenTech is in a good position. The company’s trailing twelve month interest coverage ratio (i.e. last four quarters of operating income divided by interest expense) is 29.55 which is significantly better than many other companies in the industry. And the first quarter current ratio (i.e. current assets divided by current liabilities) is now 0.98.

Related to their latest annual cash flow statement, the company reported strong operating cash flow. Cash provided by operating activities increased to $238 million for fiscal year 2019 from $207 million and $182 million in 2018 and 2017, respectively. Since the company does not have substantial capital expenditures, the company’s free cash flow is only slightly lower in each year. Most of the cash used in the business is related to the company’s stock repurchase program. In 2019, the company spent $299 million to buy back 3 million shares.

The Primary Risk

The primary risk to AspenTech is a $350 million credit agreement maturing in February 2021 of which $335 million is being utilized. At the moment, the company is only obligated to pay the interest of what is borrowed. However, how the company plans to address the principal remains to be seen.

So far, management has not mentioned anything, but the issue has to be on their minds. Assuming free cash flow remains stable, the company should have time from now until it matures to pay down the principal without much hardship simply by pausing the stock repurchase program. Alternatively, they could roll the debt forward.

This is likely management’s plan, but to be safe, it should be done soon. The reason for this is that there have been a lot of questions lately about the strength of the global economy and the condition of corporate debt. While AspenTech is strong, there is a slight risk that macroeconomic factors could cause credit to dry up and prevent management from executing the roll. As minuscule of a risk as this is, hopefully management will figure out something in the coming months, so if they need to pay down the debt naturally, then they can without interfering with normal operations.

Overall, AspenTech is not your typical tech company. They have a strong product that actually saves customers’ money. They have strong financials as evidenced by their significant margins and cash flow. And finally, their primary risk will hopefully end up being a non-issue by this time next year. Considering all of this, AspenTech could be the perfect company to round out your diversified portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Dollen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Tech Stocks

Dots over the earth connecting the world
Tech Stocks

Hot Takeaway: Concentration in 1 Stock Can Be Just Fine

Concentration in one stock can be alright under the right circumstances, and far better than buying a bunch of poor-performing…

Read more »

A worker uses a double monitor computer screen in an office.
Tech Stocks

Forget TD Stock: 2 Tech Stocks to Buy Instead

As bank stocks continue disappointing investors in 2024, you can consider adding these two top Canadian tech stocks to your…

Read more »

financial freedom sign
Tech Stocks

1 TSX Tech Stock That Has Created Millionaires and Will Continue to Make More

Constellation Software is a TSX stock tech that has delivered game-changing returns to shareholders since its IPO in 2006.

Read more »

Money growing in soil , Business success concept.
Tech Stocks

Payfare Can Potentially Provide Explosive Growth

Payfare is a global financial technology company that powers digital banking, instant payment, and loyalty reward solutions for the gig…

Read more »

online shopping
Tech Stocks

1 Hidden Catalyst That Could Ignite Shopify Stock

Here's why Shopify (TSX:SHOP) ought to remain a top growth stock investors continue to focus on for the long haul.

Read more »

Man considering whether to sell or buy
Tech Stocks

WELL Stock: Buy, Sell, or Hold?

WELL stock has a lot of upside as the company is likely to continue to grow, posting positive earnings in…

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Tech Stocks

Finally Going Private: What Should Nuvei Investors Do Now?

Understanding the reasons and factors behind a public company going private can help investors make an educated decision.

Read more »

woman data analyze
Tech Stocks

1 Stock I’d Drop From the “Magnificent 7” and 1 I’d Add

Tesla (NASDAQ:TSLA) stock is part of the Magnificent Seven, but Shopify (TSX:SHOP) is growing faster.

Read more »