Buy tech stock Kinaxis if you can accept risk

Ottawa-based Kinaxis Inc. is growing quickly. It’s a buy for long-term share price gains as its earnings escalate. But only if you can accept share price risk and you need no dividends.

We’ve added Ottawa-based technology stock Kinaxis Inc. (TSX—KSX; NASDAQ—KSXCF) to the high-technology stocks that we regularly review. Kinaxis is a buy for long-term share price gains. But only if you need no dividends and you can accept considerable share price risk.

Buy tech stock Kinaxis

Application software technology stock Kinaxis is a buy for long-term share price gains.

Kinaxis describes itself as “a leading provider of cloud-based subscription software that enables its customers to improve and accelerate analysis and decision-making across their supply-chain operations”. Kinaxis is a global enterprise with offices in Ottawa, Chicago, London, Hong Kong, Tokyo, Seoul (South Korea) and Eindhoven (Netherlands).

Kinaxis’ geographical diversification reduces its exposure to economic conditions in any single market. Last year, the US accounted for close to 68 per cent of the company’s total revenue of nearly $151 million (all numbers are in American dollars unless preceded by a C). Europe accounted for 22 per cent; Asia, for eight per cent; and Canada for less than two per cent.

Kinaxis is growing fast in Europe and Asia

While North America still accounts for the lion’s share of Kinaxis’ revenue, all the growth is taking place abroad. Last year, revenue in the US and Canada combined slipped by a marginal 0.5 per cent. Meanwhile, European revenue jumped by nearly 93 per cent. Asian revenue advanced by nearly 19 per cent.

Kinaxis is increasingly profitable. In 2019, it’s expected to earn $1.12 a share. That would represent respectable earnings growth of 15.5 per cent from 97 cents a share last year. Convert the currency and the company is expected to earn C$1.49 a share. Based on this estimate, the shares trade at a high P/E (Price-to-Earnings) ratio of 52.2 times. Kinaxis’ shares are not cheap.

In 2020 and 2021, Kinaxis’ earnings growth is expected to accelerate. Next year its earnings are expected to grow by 24.1 per cent, to $1.39 a share. The year after that, the company’s earnings are expected to jump by nearly 40 per cent, to $1.94 a share. That works out to nearly C$2.59 a share. Based on this estimate, the shares trade at a forward P/E ratio of 30 times.

Over the next two years, Kinaxis’ earnings are expected to grow at an average yearly compound rate of 31.6 per cent. Divide 31.6 per cent by 30 and you get a forward Marpep Growth Index of 1.05. Since this is above 1.0, it suggests that Kinaxis’ shares are slightly undervalued. Just keep in mind that buying on this basis can expose you to considerable price risk.

Kinaxis is costly

Kinaxis is also costly by other yardsticks of value. It trades far above its book value of $9.18 a share. And its price-to-cash-flow ratio is a high 38 times. This is much more than the ratio of five times or less that we seek. The fact is, companies with solid results and prospects are rarely cheap.

Kinaxis expects to make more progress this year. It expects its total revenue to grow by 21.4 to 24.8 per cent. This is much faster than last year’s revenue growth of 13.1 per cent. The company expects its total revenue to come in from $183 million to $188 million. It expects its subscription term licences to climb from $20 million to $22 million. Then again, Kinaxis expects its adjusted EBITDA profit margin to decline by three to five percentage points, or 23 to 25 per cent. (EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, assesses a company’s underlying profitability.)

Kinaxis has an excellent balance sheet

Kinaxis has an excellent balance sheet. It holds cash of more than $126.4 million and short-term investments of more than $55.4 million. The company has no debt. Its cash greatly exceeds total lease obligations of less than $9.1 million. It seems as if Kinaxis should pay a dividend.

True, Kinaxis is expanding rapidly and needs cash. But it generates excess cash flow. This can enable the company to expand and pay at least a token dividend without taking on debt.

Kinaxis generates excess cash flow

Last year, Kinaxis generated cash flow of more than $41.1 million. This confirms its better earnings since this exceeds cash flow of less than $34.2 million, the year before.

More important, last year’s cash flow overcame its purchase of property and equipment of more than $12.3 million. In addition, the company also took in more than $10.1 million from the exercise of stock options.

As long as Kinaxis generates more cash than it needs, it can afford to reinvest in its business, pay dividends or make acquisitions. And as long as the company earns substantially more each year, its cash flow should grow more quickly as well.

Kinaxis trades on both the Toronto Stock Exchange and the NASDAQ Stock Exchange. It’s best to buy it in Toronto. That’s where the company’s shares trade most actively. This narrows the spreads between the bid and ask prices, which can cut your trading costs. Heavier trading also makes it more likely that you can buy the number of shares that you want without affecting the price.

This is an edited version of an article that was originally published for subscribers in the April 26, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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