Dip Provides Entry in Dassault Systemes

Dassault Systemes (DASTY - commentary - Cramer's Take) has traded down nearly 6% after the company trimmed its earnings outlook by 5 euro cents last Tuesday morning.

The company now expects to earn between 1.96 euro and 2.00 euros in 2007, compared with earlier guidance of 2.00 euros to 2.05 euros. With a solid overall business and a valuation that I believe looks reasonable, investors will ultimately find the current price to be an excellent entry point.

Dassault designs engineering software used for PLM -- product lifecycle management -- (81% of 2006 revenue) and mainstream 3-D design (19%). It has grown through organic growth and a series of acquisitions, including Abaqus in 2005 and MatrixOne in 2006 -- each of which was in the order of $500 million. It is 44.5% owned and effectively controlled by France's Groupe Industriel Marcel Dassault.

Dassault offers software under several brands, including Solidworks for Mainstream 3D design and CATIA, DELMIA, SIMULIA and ENOVIA for PLM. However, a key aspect of its growth strategy is to combine the strengths of its various programs and allow customers to customize solutions using the company's V5 platform.

The company generates 47% of its revenue in Europe, 31% in the Americas and the remainder in Asia. Although it blamed the lowered outlook on the weak dollar, the company's latest annual report said its greatest currency exposures are between the euro (its reporting currency) and the yen, pound and Korean won.

More than half of the company's sales are on a recurring (software rental or maintenance contract) basis rather than through perpetual license fees. With a largely industrial customer base, revenue growth drivers include business investment and industrial production in its end markets.

In 2006 Dassault grew 24%, much of which was contributed by the Abaqus and MatrixOne acquisitions. On an organic basis sales grew 10% (12% assuming constant currency exchange rates).

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At the time of publication, Trent was short naked put options on Ansys, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.