Dazzling Q2 Report by AspenTech Shows Factories Embracing Digital Revolution

Jon Markman

Aspen Technology ((AZPN) -Get Report) makes software that industrial companies need to modernize factories and meet new regulatory targets. Investors are still underestimating its business prospects.

The Bedford, Mass.-based company on Thursday reported blowout earnings and guided estimates higher for 2021. Despite the pandemic, business is stable and getting better. How ironic that Aspen crushed its targets on the same day that sclerotic Cisco Systems ((CSCO) -Get Report) showed the old approach to enterprise technology is dying.

It makes perfect sense. Digital transformation, the idea that businesses can be made more efficient with data analytics and software, has become a vital part of meeting modern regulatory demands.

Ironically, in tech terms, the foundation is ancient.

AspenTech got its start in the heart of the 1970s energy crisis when unfriendly middle eastern oil cartels threw the global economy into a tailspin. Bottlenecks developed. Lines formed at gas stations.

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While President Carter was pleading for Americans to use less fuel and wear sweaters, behind the scenes bureaucrats were looking to academia for a fix. A brilliant engineer named Larry Evans began recruiting the brightest minds from MIT. The goal was to find a cost effective way to transform abundant coal and shale into usable energy.

That group, called the Advanced Systems for Process Engineering project developed a ground-breaking type of process software. Later, Aspen Tech, the spinout company, would develop cutting edge process simulators.

In many ways, AspenTech is still solving the same process problems today. Its custom software helps energy and petrochemicals, mining, paper and forest, pharmaceutical, manufacturing and consumer packaged goods companies run critical assets more efficiently.

AspenTech works on six continents, with 2,100 companies across every sector of the global economy. From multibillion dollar oil rigs and refineries, to bottling plants, Aspen’s software is foundational.

Its engineers work closely with companies to unlock additional capacity, maximize uptime, improve reliability and predict future performance. In the process, clients have been able to save 100s of millions of dollars.

While cost savings is great, it’s the regulatory threat that is forcing the digital transition. Stricter standards for greenhouse gas emissions is pushing large enterprises to run their critical assets faster, safer, longer and greener.

This is a megacycle. For global industrial companies, there is no going back. They must modernize or face being regulated out of existence.

A major beneficiary is Aspen Technology, with its deep roots in the industrial world. This theme popped up repeatedly Thursday during a conference call with analysts.

Antonio Jose Pietri, chief executive, noted that although customers have been impacted by the global pandemic, they are pushing ahead with most of their digital and automation plans because not doing so would put them behind regulatory timelines.

That existential threat helped the company report revenues of $590.2 million for fiscal 2020, down only 1% from a year ago. For 2021, however, managers now expect revenues will be in the range of $704 million to $754 million, well above the FactSet consensus midpoint estimate of $598 million.

Profits next year are expected to be between $374 million to $420 million, with free cash flow anticipated to come in somewhere between $260 million and $270 million.

AspenTech shares shot up 29%, to $126.12 Thursday on the stronger outlook.

Despite the gains, the stock is still well off the $141 high set in February. And with a market capitalization of only $8.4 billion, shares are attractively priced.

McKinsey and Co., a global consulting firm, estimates that digital transformation will accrue $3.7 trillion in value to global manufacturing by 2025. Software, engineering and consulting is the most lucrative part of that process.

AspenTech holds key competitive advantages in these disciplines. Its suites and tools are considered to be best-in-class, and the corporate reputation is entrenched.

Investors were right to bid up the shares Thursday, however they are still underestimating the size of business cycle and the key role AspenTech is likely to play. Shares could reach $210 during the next 18 months, a gain of 67% from current levels.

Buy Aspen Technology shares into a dip below $110. 

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