SLP - Simulations Plus Inc

[Guest Schwab711]

I use to own this (kicking myself for selling at $4.31 after special dividend) and I think the below summary will show you should never sell a good company. SLP sells software ranging in functionality from AP high school courses to high-end pharmaceutical research. This is part of the moat where this highly specialized and complex software that is vital to being competitive in pharmaceutical sales or research is taught when students first take chemistry and continues to be used at every stage of a researchers' career. There are competitors but due to the market share, SLP is slowly gaining more and more market share in this growing niche industry due to this specialization-effect.

 

SLP is starting to penetrate the HS and undergrad software sales markets now that nearly every large and mid-size bio-company and every government health department is a customer represents part of the future growth. Continued customer growth could occur if the bio-industry ever starts to deconsolidate again or if incentives continue to promote consistent pipeline of new startups in the area. Finally, similar to every company I own or have own, they raise the price often and at a considerable clip. However, the piece de resistance is that management has shown itself to be incredibly shareholder friendly and astute capital allocators. They sold a low-margin low-profitability subsidiary (Words+) for a few million and returned the money to shareholders through special dividends. This helped the company reach their potential for ROIC and other important return metrics.

 

So what would you pay for this company and at what market cap do you begin to purchase? I think I would probably buy back in at $90mm market cap.

 

http://seekingalpha.com/article/365731-bio-software-developer-with-a-12-percent-growth-and-a-5_7-percent-yield                                                                                                                                                                                             

[infinitee00]

I had owned this company from 2008 to 2012 and sold ( probably should have held on to it). I agree about its niche and that management is pretty solid, but at the current price though, I actually think it is fairly valued to slightly overvalued. What do you expect the future growth to be? I put it between 12-15%.

[Guest Schwab711]

8% - 12% growth would be excellent in my opinion. Not a shot at you but I think most investors over estimate long-term growth for DCF valuations. In this case, the business fundamentals lead me to believe that there isn't much volume growth left and future growth must be driven by pricing growth. There is also considerable M&A in the Biotech industry which will negatively affect revenues. The valuation for SLP would vary significantly based on the long-term growth rate used. An investor's opinion of how much market penetration is left in this niche market will definitely influence the long-run growth rate used (college undergrad and high school sales will likely represent future growth). I believe there is a lot of pricing power that is currently under-utilized that could help make up for flat volume growth that will certainly come at some point soon.

 

However, even 8% growth might surprisingly still make SLP a "good" investment at 40x P/E ratio due to operating leverage and high margins (similar to ELDO I've mentioned).

 

SLP Margins and returns are incredible:

Gross Margins: 87.7% (3Q14 GM was 93.9%!!!)

Op Margin: 56.0%

Incremental Op Margin: 66.0%

ROTC: 40%+

ROE: 20%+

ROTE: 35%

 

 

Long-term operating margins will likely reach 60% - 62% as revenue growth costs significantly less than current revenue. Most revenue is re-occurring with customers unlikely to consider other options. Due to the 'stickiness' of their product, it is possible price increases lead to future operating margin of 60% - 65%. FY14 revenue should come in at $11.25mm.

 

Long-term margins with current revenue gives:

FY14 rev:                              $11.25mm

Op Income (65% margin):    $7.313mm

Taxes (33.6% tax rate):      -$2.457mm

Net Income:                        $4.856mm

Shares Out:                        16,455,078

EPS:                                    $0.295

 

This means that SLP is really selling at 22.8 P/E (using projected long-run operating margins). With revenue growth of 8%, revenue for FY15, FY16, and FY17 would be $12.15mm, $13.12mm, and $14.17mm, respectively. EPS @ 65% margin would be $0.319, $0.344, and $0.372, respectively. This is ex-Cognigen Corp acquisition. EPS for FY17 could easily surpass $0.40. If growth rate could reach 12% however, EPS for FY15, FY16, and FY17 would be $0.319, $0.357, and $0.400, respectively (without benefit of accretive acquisition).

[Guest Schwab711]

http://seekingalpha.com/pr/12170545-simulations-plus-reports-first-quarter-fy2015-financial-results

 

It's so disappointing when great companies go through di-worse-ifacation. SLP acquired Cognigen (for $7m) who inaugurated their inclusion  with SLP by reporting $1.1m in revenue, $600k in GP and $550k in SG&A. Results in <5% EBIT margins for ~$50k in increased revenue or $250k annualized. At 28x earnings and significantly lower margins I really hope it does solidify or improve the competitive advantage of the software or SLP got a lot less interesting. However, adjusted EBIT is $1.25m (25%+ Y/Y) and NI would likely have been $875k ($3.5m annualized). This is likely the floor for FY15 earnings as growth in software continue at generally double-digit rates.