Illustration by Alvaro Bernis
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What do bleach, microchips, condiments, and pickup trucks have in common? They are all in short supply. And that should be good news for
Kinaxis,
a logistics software company.
Ottawa-based Kinaxis (ticker: KXS.Canada) has a leading position in supply-chain planning software. After a pandemic-induced hiccup, sales growth is poised to accelerate anew.
The stock is trading at about 142 Canadian dollars ($117), off nearly 40% from its 52-week high. With the economy booming again—and global supply chains stretched to the breaking point—the company looks perfectly positioned for its shares to regain their recent glory.
Kinaxis isn’t like other supply-chain-management software companies. It doesn’t manage supply chains; its products help to plan supply chains—how much product to make, where to make it, how to ship it, and, most important, what to do when things go wrong. Its software allows businesses to run simulations that solve, for instance, how to supply South America when a manufacturing plant in Japan goes down.
That’s different from the supply-chain planning software of the past 30 years, which is typically embedded within an enterprise resource-planning product from the likes of
SAP
(SAP). Those products usually look at historical data to predict the future and aren’t as helpful when businesses deal with black-swan events—like a pandemic.
Kinaxis’ specialty is higher-level planning and forecasting that works on top of existing systems and can mesh data from different suppliers with disparate operating systems.
“This is an area where we see massive change,” says Praesidium Investment Management co-founder Peter Uddo, who sees a huge upgrade cycle in supply-chain software. His fund owns Kinaxis shares.
Kinaxis has a history of outperformance. Over the past five years, its stock has returned about 24% on an average annual basis, better than the 17% return of the
S&P 500 index.
Two issues have weighed on the stock, which is down about 21% in 2021. Rising interest rates have hurt all richly valued, high-growth stocks. Then there is Covid-19.
In 2020, investors weren’t sure whether the pandemic would be a boon or curse for Kinaxis. Many supply-chain projects were put on hold early in the year as companies looked to preserve, not spend, cash. Fourth-quarter sales declined year over year.
Business is now recovering. In March, Kinaxis said its sales pipeline was 40% higher than at the end of 2019. The company is expected to earn $1.43 a share in 2022 on sales of $316 million, up 28% from 2021. Operating income is projected to be $34.5 million. That points to a profit margin of nearly 11%, higher than usual for a software company of Kinaxis’ size. Operating margins for software firms in the
Russell 2000
index are about minus 3%.
How is that possible? Kinaxis makes complicated software. Customers “are dealing with a high level of complexity…the unknown,” Chief Financial Officer Richard Monkman tells Barron’s. “We bring simplicity, we bring insight.” At thousands of dollars per subscription, its RapidResponse product is far more expensive than Office 365, but it offers a lot of value with little credible competition.
The company’s attractive software niche carries a few potential risks. For one, having higher-than-average profits brings competition, and a company like SAP could start offering similar products for less. Kinaxis software is also used only by the bluest of blue-chip companies with the most complicated supply chains, including
Toyota Motor
(TM) and
Toshiba
(6502.Japan). Sales per customer, at roughly $1 million a year, are impressive, but down the road, Kinaxis might have to develop midmarket solutions to keep growing.
It is already doing just that with RapidStart, a newer product that functions a bit like a “lite” version of RapidResponse and is winning new business. Management was encouraged by customer response in the first quarter.
Midmarket opportunities are picking up as companies of all sizes look to upgrade their supply-chain game.
Rivals might find it easier to buy Kinaxis than try to compete. In April,
Panasonic
(6752.Japan) bought Kinaxis competitor Blue Yonder for more than $8 billion. It paid roughly 25 times software-as-a-service-based sales for the larger, but slower-growing, company. Applying a similar multiple to Kinaxis yields a stock price closer to C$200 a share, up about 40% from recent levels.
That’s not cheap, but Kinaxis is worth the premium valuation. RBC analyst Paul Treiber, who has an Outperform rating on the stock, points out that software investors add up growth and operating margins to compare multiples. On that basis, Kinaxis, with projected margins of about 10% and sales growth of 20%, compares favorably to any top software company, including
Adobe
(ADBE) or
Autodesk
(ADSK).
Treiber values Kinaxis at 12 times enterprise value to his estimated 2022 sales of $321 million. His C$190 price target is in line with his peers, implying big gains. And that kind of performance is always in short supply.
Write to Al Root at [email protected]
