Upgrading Autodesk to Outperform - Analyst Blog

We upgrade Autodesk Inc. (ADSK) to Outperform from our previous Neutral recommendation, given our long-term confidence about ADSK's growth opportunities.

Over the long term, we remain positive on the stock, given its operating margin leverage, strong revenues due to stability in end market,increased demand for 3D products, expanding market share, a diversified product pipeline and cost-cutting initiatives.

Autodesk's business outlook is improving with an expectation for potential revenue growth based on a recovery in the overall end market demand this year and the next.

Our raised target price of $43.00 from $30.00 is based on a P/E multiple of 31.9X our 2012 EPS estimate, a discount to its peer group but a premium to the S&P 500.

Third Quarter Highlights

Autodesk's third quarter 2011 revenues beat the Zacks Consensus Estimate while EPS was in line. Results were driven by a double-digit growth in all geographical regions, new licenses and impressive cost controls.

Third quarter earnings of 25 cents per share were in line with the Zacks Consensus Estimate. Earnings, including stock-based compensation but excluding one-time items, leaped 66.7% year over year from 15 cents per share reported in the year-ago quarter, primarily driven by a strong revenue growth.

Revenues increased 14.3% year over year to $476.7 million in the third quarter, as compared with $416.9 million in the prior-year quarter. This was well above the Zacks Consensus Estimate of $472.0 million.

The year-over-year growth was driven by higher license and other revenues, which increased 19.4% year over year to $282.0 million. Maintenance revenues rose 7.7% to $194.7 million in the quarter.

Guidance

For the fourth quarter of 2011, Autodesk expects revenues to be in the range of $500.0 million to $520.0 million. Non-GAAP earnings are expected in the range of 30 cents to 33 cents per share for the quarter. This excludes 6 cents related to stock-based compensation expense, and 5 cents for the amortization of acquisition related intangibles, net of tax. The current Zacks Consensus Estimate (including stock based compensation but excluding amortization related charges) is pegged at 27 cents per share for the fourth quarter.

For fiscal 2011, Autodesk expects revenues in the range of $1.924 billion to $1.944 billion (12.0% to 13.0% year-over-year growth). Non-GAAP operating margin is expected to increase in the range of 430 basis points to 460 basis points on a year-over-year basis. Non-GAAP earnings are expected to be in the range of $1.27 to $1.30 per share for the fiscal year. The current Zacks Consensus Estimate is pegged at $1.04 per share in earnings for fiscal 2011.

Initial guidance for fiscal 2012 was encouraging. For fiscal 2012, Autodesk forecasts revenues to increase 10.0% year over year. Non-GAAP operating margin is expected to increase approximately 200 basis points on a year-over-year basis. Autodesk did not provide any earnings guidance. The current Zacks Consensus Estimate is pegged at $1.35 per share in earnings for fiscal 2012.

Our Take

The estimate revision trend for Autodesk remains considerably positive. The Zacks Consensus Estimates for the fourth quarter 2011 and full year 2012 have radically gone up, following the company's strong third quarter 2011 results.

Autodesk continues to gain significant market share in the majority of its businesses. New customer wins and strong adoption of its products are expected to boost its top-line growth going forward. Moreover, increasing operating efficiency is expected to drive earnings growth in the near term.

We view bottom line and top-line guidance as encouraging, given that Autodesk tends to guide conservatively. Revenue estimates for 2012 are up by 2.8% and the earnings per share estimate by 11.6%.

We expect the shares to drive higher on improving license trends, growth in new accounts and subscription,improving European business, growing key metrics and increasing penetration in emerging markets.

However, foreign exchange headwinds and intense competitionfrom Adobe Systems Inc. (ADBE), Apple Inc. (AAPL) and Avid Technology (AVID) are areas of concern.

Autodesk has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).