Autodesk Is Becoming Diverse by Design

Wanna get a piece of Harry Potter's three-headed dog? Autodesk might be the stock for you.

Long known for its computer-assisted design software called AutoCAD -- a favorite of architects everywhere -- the San Rafael, Calif.-based firm has broadened in recent years to write software for such diverse industries as construction, manufacturing, mapping, media and entertainment.

According to CEO Carol Bartz, software from the company's Discreet division produced Fluffy, the three-headed dog that guards the mysterious trap door in Harry Potter and the Sorcerer's Stone. Other gee-whiz effects from the firm's software appeared in The Perfect Storm and Gladiator, and the company says up to 75% of the games written for Microsoft's(MSFT Quote) much-touted Xbox video game console will be developed using its products.

In fact, the company's Discreet unit now accounts for approximately 20% of the company's revenue, while AutoCAD, long the company's meat-and-potatoes product, accounts for a now less-concentrated 30% to 40% of sales.

After reporting earnings Thursday that beat Street estimates by a penny, shares of Autodesk zoomed in Friday trading, despite the fact that the company actually lowered financial guidance. The stock gained $3.02, or 8.9%, to finish at $36.97. Its revenue, at $216.4 million, was lower than consensus estimates of $227 million, but the company said it achieved its earnings number through strong cost control.

Analysts attributed the move to the stock's relatively attractive valuation, coupled with its dominant franchise in its core AutoCAD market. Even after Friday's jump, the stock still trades for a relatively humble 14.9 times fiscal 2003 earnings. Autodesk's 2003 fiscal year will conclude at the end of January 2003.

Compare that valuation to some of the headier gamemakers that use its software like Electronic Arts, which trades at 47 times its comparative period earnings, or Agile Software(AGIL Quote), which makes design and collaboration software, that trades at 6.5 times its comparative period revenue. (Agile, briefly profitable earlier this year, isn't expected to show profits again until April 2003.) On a comparable basis, Autodesk trades at 1.9 times fiscal 2003 revenue.

William Broun, an analyst with A.G. Edwards, who has a strong buy rating on Autodesk, points to the company's valuation as one reason he likes the stock, and thinks shares could go to $45. While the stock has gained 25% since a recent closing low of $29.60 on Sept. 26, Broun says the stock has remained relatively cheap because many investors still only think of Autodesk as a one-product company.

"All the different products now give it diversification, but it's a harder story to understand. In part, when you say Autodesk, people think AutoCAD, but it's a very different company today," says Broun.

For instance, because the company's software is used widely in the manufacturing industry, the current weakness in that sector has impacted its business there. But because it also sells to the construction industry -- which is benefiting from low interest rates now -- it has reaped results from more activity there. And with 60% of its revenue coming from overseas, its revenue is spread out geographically as well.

CEO Bartz makes a similar pitch. When asked why Autodesk, which claims to be the fifth-largest PC software maker, doesn't have top-of-mind attention on Wall Street, she points to the company's dominance in the 1980s with its design software.

"Frankly, I think a lot of people had determined along the way that all that CAD stuff happened in the 1980s," Bartz says. "But think about it: you're going to buy a new car in a couple years, and someone needs to design it. It's a very enduring market."

Along the way, the company has been busy in other areas. In 1999, it folded its Kinetix business into its acquisition of Discreet Logic to form its current Discreet division, birthplace of Fluffy. As Bartz now says, "I doubt you could find a film with special effects that you can't believe that wasn't done using our software." And it's developed a healthy business in software that helps people make maps, too.

Not that it hasn't stumbled along the way. No stranger to the B2B craze of the late 1990s, it spun off its hosted construction applications business as the high profile start-up Buzzsaw.com. As the window for dot-com IPO's closed, Autodesk had to fold Buzzsaw back into its own operations in August of this year after sinking $30 million into the effort. Another Autodesk spinoff, Redspark.com, ceased operations in October.

But Bartz says with 30,000 projects being run through Buzzsaw.com, she got to keep "a great asset on our books" and that "we feel really good about what we learned." That's a humbled CEO's way of saying "Hey, we gave it a shot, now we're getting back to business."

Of course, the other side of the investment story for Autodesk is that, like all tech companies, it's feeling the pain of the slow spending environment. U.S. Bancorp Piper Jaffray Analyst C. Eugene Munster sounded a cautious tone in his note on the company after listening to its conference call on Thursday.

"Autodesk executed well in a tough economic environment. However, based on the timing of product releases and the macroeconomic environment, we are lowering our [earnings] growth rate from 15% in FY2002 to 4% in FY2003," wrote Munster, who rates the stock a buy. "While we believe on the margin Autodesk shares will be viewed as a safe investment -- strong franchise, solid balance sheet and effective cost control -- shares of Autodesk will likely be impacted by the timing of product cycles. Therefore, we see a more attractive entry point at $28 to $30." (His firm hasn't done recent underwriting for Autodesk.)

His estimate revision came after Autodesk took down its guidance for its fiscal fourth quarter. While analysts were expecting earnings of 62 cents a share on revenue of $263 million, the firm said it expected to earn between 51 cents and 61 cents per share on $245 million to $255 million in revenue.

Broun, however, thinks the stock could be a good bet, and that Bartz is being conservative with her numbers, given the uncertain economic outlook.

"I think they're just trying to be cautious, and that they'll revisit their outlook in February," Broun said. "While it's down from prior guidance, this is not horrible in the grand scheme of things."