Initiating Autodesk at Neutral

Autodesk, Inc. (ADSK - Analyst Report) is well positioned to benefit from a recovery in the economic environment, but we do not expect a significant impact until the second half of fiscal 2011 (ending Jan. 2011). Therefore, we remain Neutral on the stock, given our long-term confidence about Autodesk’s growth opportunities. Our target price of $28.00 is based on a P/E multiple of 25.5X our 2011 EPS estimate, a discount to the peer group.

Autodesk reported better-than-expected third quarter of 2010 results, but below year-ago levels. Moreover, management provided conservative fourth-quarter guidance.

With falling revenues, Autodesk has been generating weak cash flows. The company generated $121.2 million cash from operating activities fiscal year to date, a decline of $386.3 million from the comparable year-ago period.

On a positive note, with cash of $1.05 billion -- $4.52 per share -- and no debt, Autodesk has the necessary liquidity to continue as the leading developer of 3D designing, with the scope of making favorable acquisitions as required. Moreover, Autodesk had $401.2 million in deferred (recurring) revenue of customer maintenance contracts.

In the long term, we expect Autodesk to benefit from increased demand for 3D products, cost-cutting initiatives, margin expansion and excellent liquidity. Moreover, Autodesk should be a major beneficiary of the global economic recovery and the rapidly improving IT spending environment.

We believe Autodesk is well positioned for additional upside as it enters fiscal 2011. While its business and end-market demand are showing signs of stabilization, we believe the recovery will be slow in the near-term due to intense competition from Dassault Systemes, Adobe Systems Inc. (ADBE - Analyst Report), Apple Inc. (AAPL - Analyst Report), Avid Technology Inc.(AVID - Snapshot Report), Sony Corp.(SNE - Snapshot Report) and Thomson Reuters Corp. (TRI - Snapshot Report).

In our view, Autodesk is fairly priced.

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