Computer-Aided Success (PMTC, DASTY, CTXS)

By Dean Lundell | July 05, 2007 AAA

Enterprise-level software plays an integral part in the design and manufacture of automotive, aerospace and a host of other critical applications. A company with a narrow focus or one with a broad-based product suite each offers its own set of risks and potential rewards. We're going to take a look at three companies that bring this sharply into focus.

Successful Turnaround
Parametric Technology (Nasdaq: PMTC) formed in 1985 and found itself in trouble for a number of years earlier this decade. The woes were due to a lack of investment in research and development, price competition from low-priced rivals and a maturing market for the end product. The bad times reached a pinnacle when PMTC had a -22% return on capital.

To stop the bleeding and start the breathing, management embarked on an acquisition spree and has digested eight firms in the last three years. These acquisition contributed much towards the company's turnaround. For example, the acquisition of Arbortext in 2005 enabled Parametric to get into electronic content management, and Mathsoft in acquired in 2006 now accounts for literally two-thirds of Parametric's revenue.

The company's premier product is Pro/Engineer which is to design a multitude of different products, including toys, digital cameras, automobile frames and medical equipment. The company also introduced tiered pricing for tiered applications. PMTC typically allocates 17.2% of its sales to research and development.

Parametric has successfully reengineered itself into a product life-cycle software provider (PLM) from its historical roots as a CAD/CAM provider. The flip side is that PMTC is still focused on economically sensitive areas such as autos and aerospace. Additionally, the company is now locking horns with industry heavyweights such as Dassault Systemes SA.

Transitioning to Three Dimensions
Dassault Systemes SA (Nasdaq: DASTY) is a major player in the product life-cycle (PLM) business and has one of the largest market shares with 25% of the market. In addition to this, the company has fostered close relationships with the academic community so that when students go out into the real world, they are already familiar with Dassault's systems. The company also partners with IBM (NYSE: IBM) for value-added service and sales to large accounts.

Dassault Systemes SA has a well-deserved reputation for research and development. Traditionally, DASTY allocates over a quarter of its sales revenue to technological innovation. Perhaps that is why Boeing (NYSE: BA) employed Dassault's systems for the design of its new 787.

One of Dassault's newest products is SolidWorks, a three-dimensional CAD product designed to help customers reduce product-development and time-to-market costs. Dassault has plenty of competition nipping at its heels as Autodesk (Nasdaq: ADSK) and MSC Software (Nasdaq: MSCS) are not going to let the company rest.

Flogging a Dead Horse

Citrix Systems (Nasdaq: CTXS) has acquired its way into becoming a provider of remote-access software products to a great deal of high-growth market segments. Citrix products allow customers to centralize applications on their servers to save time and effort in managing and supporting those applications.

In the past, Citrix partnered with Microsoft (Nasdaq: MSFT), but there is a possibility that Microsoft will be developing its own product. This has been neither confirmed or denied, but the prospect of going toe-to-toe with the 800 pound gorilla is daunting to say the least. Its 13.1% allocation of sales to research and development pales to Microsoft's.

Citrix's core constituency markets are now mature and the company has less than a 10% foothold in a market dominated by products developed by Cisco Systems (Nasdaq: CSCO) and F5 Networks (Nasdaq: FFIV).

The Upshot
Although each of these companies have price-earnings multiples in the mid-20s, the sales-to-market-capitalization ratio is far more telling. Parametric's market cap of $2 billion divided by its $912 million in sales gives us about 2.2-times. Dassault's $7.4 billion in market cap divided by $1.45 billion in sales is roughly 6.33-times, and Citrix's $6.4 billion market cap divided by its $1.08 billion in sales gives us 5.9-times. Which do you perceive as being under-valued? (To get started, check out Ratio Analysis Tutorial.)

Market performance is the bottom line of course, at least for us. In the past year, Citrix has declined about 15%, Dassault has risen roughly 20% and Parametric has appreciated around 70%.

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