A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that provides chain management software to large firms.
Pat notes that the company’s cloud-based model relies on online subscriptions, which generate a steady revenue stream. Also, its customers are for the most part large national or multinational firms from a diverse group of industries. Still, as Pat points out, the stock trades at a high 71.6 times the company’s forecast earnings and it operates in a highly competitive industry.
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Kinaxis Inc. (symbol KXS on Toronto; www.kinaxis.com), provides cloud-based subscription software that big companies use to manage their supply chains. Kinaxis is based in Ottawa.
The company’s shares began trading in June 2014 at $13 a share. The current price is down from the August 2018 high of $98.47.
Kinaxis’s main product is RapidResponse, which helps manage supply, demand, inventory, order fulfillment, and capacity planning. Its applications include matching production and inventory to demand, analyzing sales patterns, and forecasting.
Subscribers pay a monthly or yearly fee for software implementation, support and upgrades; contracts are typically two to five years in length, which provides the company with a steady revenue stream rather than a series of larger one-time payments for the initial sale and upgrades.
Kinaxis’ customers are generally large national or multinational enterprises with complex supply chain requirements. They represent a diverse group of industries, including electronics manufacturing, aerospace and defense, industrial products, life sciences and pharmaceuticals, automotive, and consumer goods. The company’s customers include Unilever, Nikon, Ford, Dyson, NCR and Nissan. The company also works with major consulting organizations, such as Accenture and Deloitte Consulting LLP, which introduce Kinaxis products to their clients as supply management solutions.
Inner Circle: Quarterly revenue is up 24.2% and earnings up 39.5%
Since going public, the company’s revenue has grown 115.0%, from $70.1 million in 2014 to $150.7 million in 2018. (All figures except share price and market cap in U.S. dollars.) Meanwhile, earnings have gone from a loss of $0.2 million ($0.01 per share) in 2014 to a profit of $14.4 million ($0.56 per share) in 2018.
In the three months ended March 31, 2019, revenue increased 24.2%, to $45.8 million from $36.8 million a year earlier. The company added new customers, but also expanded on the contracts with some of its existing clients. Earnings jumped 39.5% in the quarter, to $6.9 million, or $0.27 a share, from $5.0 million, or $0.18.
Kinaxis holds cash of $199.9 million and has no debt. It spends a high 18% of its sales on research and development.
The company operates in a competitive industry, and the stock trades at a high 71.6 times Kinaxis’s forecast 2019 earnings of $1.16 a share. However, the company has a steady base of recurring subscription revenue from major customers—along with its very sound balance sheet.
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