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With inflation rising to new highs, and Federal Reserve hiking rates more aggressive, the macroeconomic environment has become unstable. For those who want to stay invested, it is necessary to choose an elastic stock to navigate extremely volatile market situation. In this case, Bentley (NASDAQ: BSY) which is a stock of information technology and not the Bentley Motors we are more familiar with, delivered better performance than the S&P 500 as well as the tech sector represented by the Invesco QQQ Trust (QQQ) as shown below.
Considering that this performance was achieved during a period of high inflation that is synonymous with volatility for both equity and bonds, I consider that the market views Bentley as more likely to withstand the pressures. of inflationary. So, this thesis aims to confirm its attractiveness as an inflation-proof stock and I will start by analyzing the topline of infrastructure and engineering software and solutions company.
The revenues
The company has been able to continue to increase revenues by double digits since the December 2019 quarter except during the Covid period when year-on-year growth dropped to 6.2% mostly due to Civil Engineers not attending work. . There are two reasons for this sustainable performance.
First, there is increased demand for Bentley’s Seequent product used for 3D modeling in mining activities and to locate geothermal energy sources, all as part of the secular trend toward renewables. The second is NRR growth, where retained earnings from current customers grow, continuing to be above 100% as shown in the blue chart below. This shows that Bentley is able to squeeze more “stable” sales from its client base, especially when viewed in the context of bleak economic conditions where it becomes difficult to sign up new customers. .
NRR and ARR (www.seekingalpha.com)
Second, the ARR metric (green chart above) that measures annual recurring revenue from current subscriptions is at 13%, lower than ServiceNow (NOW), but, rapidly advancing (from 8% in 2020) as the company adds more applications to its product portfolio, either through in-house development or acquisitions. For 2022, ARR growth is expected to be 14% to 16%.
Upon further investigation, in the same way as gaming software as a service (“SaaS”), the company was able to change its revenue model with more than 85% of subscription -based sales, which is more predictable than annual perpetual licenses. However, unlike most SaaS stocks I’ve covered in SA, Bentley is profitable.
The profitability
A notable point is that despite the decline in growth during the Covid era, Bentley remained profitable and this shows that the business model remains resilient to bad conditions. Another reason for this stability is the high gross margin of 77.6%, which is synonymous with the platform requiring relatively less time doing software development work.
Second, in contrast to ServiceNow which spends more on go-to-market than operating margin costs, Bentley’s approach is more disciplined and compatible with value strategy. So its EBIT margins are almost three times higher as shown in the table below.
Comparison with peers (www.seekingalpha.com)
More importantly, Bentley executives are committed to a 1% margin expansion per year and are releasing a normalized adjusted EBITDA of approximately 33%, or 1% up from 32% in 2021.
This can be done when looking at Autodesk’s (NASDAQ: ADSK) operating margins of 16.93% the latter also makes software like AutoCad that Engineers use when designing infrastructure. Comparing Autodesk’s gross margins of more than 90% also shows the potential for Bentley to improve profitability as it expands further and gets more revenue to spread its fixed production costs.
To this end, there are opportunities to increase sales volumes because Bentley’s software suite is viewed as an antidote to rapid wage inflation in many parts of the world.
Product appeal as anti -inflation
Blessed with more design works as governments spend more on infrastructure plans but face talent shortages in a crowded labor market, design engineering firms are faced with an unprecedented dilemma. To help them, there are applications like Bentley’s E365 that enhance productivity and allow accomplishing more projects without having to recruit more people.
There is also Digital Twin infrastructure, which is about using simulation software to geospatially see large physical infrastructure such as buildings or bridges instead of traveling to a site. Today, the application of computers to infrastructure design is not a new thing, but, Digital Twin is going one step further by integrating new technologies such as augmented reality and the internet of things and thus making the experience is more engaging.
As a result, Bentley got help from the social distancing measures caused by the pandemic in the same way that digitally changed physical office work for millions of employees. This temporary enhancement is now becoming more permanent with employees capable of designing remote buildings with less need to travel. Staying on the rationale of profitability, Bentley has a partnership with Microsoft’s Azure for its iTwin cloud platform that allows it to grow without spending too much on sales and marketing.
Investor Presentation (www.seekingalpha.com)
Moreover, of the leading Engineering News-Record (“ENR”) companies that continue to use Bentley products as evidence of run rate growth (figure above), the outlook for 2022 is for revenues that’s $ 1.125 billion or a 30% growth in 2021.
This may seem like an ambitious target given the US economy contracting to 1.4% annualized pace in Q1-2022.
Risks and appreciation
Furthermore, Bentley had a debt of $ 1.159 billion at the end of December 2021, contracted to finance its acquisition of Seequent in March 2021 in the amount of $ 1.05 billion. For this purpose, the company issued convertible notes with an annual interest payment obligation of $ 3 million. Looking deeper, the company has total cash of $ 329 million and receivables of $ 235.6 million with executives talking about reducing share repurchases in 2022 and instead, debt repayment. As such, there is no risk of financial distress. Moreover, with its software used by 90% of the top 250 design companies and benefiting from a faster growth rate than competitor Autodesk (according to the peer comparison table above), it means that Bentley has pricing power.
Going forward, in the worst case scenario that inflation turns out to be an ugly beast devouring part of the expected growth of 30%, there will always be a $ 550 billion federal infrastructure stimulus over the next five years covering items like bridges. , roads, energy, and water systems. Assuming Bentley gets only 0.1% of $ 550 billion in 2022, this means additional annual sales of $ 110 million (550/5 x 0.1%) over the next five years. It will generate nearly 13% of its sales for 2021.
Therefore, with 30% of expected growth and positioned to benefit from infrastructure spending, the company deserves better appreciations. Adjusting the following Sales Price metric to the same fast -growing Service Today level or 15.67x (according to the peer comparison table above), I got a target of $ 52.3 (15.67/13.04 x 43.5) based on the current price of shares of $ 45.3.
Conclusion
Therefore, Bentley is a buy, but it remains a moderate target, both due to higher valuations with respect to the IT sector and the fact that volatility persists. It said the stock could benefit from the enthusiasm of investors in a stock market that seems to move away from the broader value strategy that determines stock market performance since November 2021 after it became clearer that the Federal Reserve was need to raise interest rates.
Moreover, as seen by the performance of the Nasdaq over the last two days, investors seem to have regained confidence in the technology, but, it is important to be selective and select stocks that can face bad economic conditions more firmly. The Bentley is one of those because of some of its inflation-proof features as I have summarized in the table below.
Anti -Inflation Features (www.seekingalpha.com)
To be realistic, Bentley’s price performance is lower than in the energy sector, but I remind investors that at a higher consumer price index is the specter of stagflation or high inflation accompanied by sluggish economic growth in which demand for commodities tends to drop sharply.
Along the same lines, many investors have turned to REITs because of the ability of landlords to raise rents to counter inflation and pay large dividends, but, increasing mobility and working from home both appear to have changed perspectives for the residential real estate sector. Also, with supply chain challenges and commodity-related uncertainty due to the conflict in Eastern Europe, these are unprecedented times and need to think differently.
Finally, considering the above factors, even though its dividend yields are only 0.29%, but with the capacity to pay more, Bentley remains a better bet against inflation.