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Bull of the Day: AspenTech (AZPN)

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Aspen Technology (AZPN - Free Report) , aka AspenTech, is an $8.5 billion provider of industrial software that helps manufacturers and engineering firms monitor and optimize their operations in a process commonly referred to as asset performance management.
 
Their most recent quarterly report on August 12 blew away all expectations and launched the stock 30%. More on that coming up after we learn about their business.
 
AspenTech solutions aid in optimizing process manufacturing by supporting real-time decision making, predicting equipment failure, and providing the ability to forecast and simulate potential actions.
 
Asset management solutions not only assist manufacturers in understanding the operating conditions of their assets but also to take appropriate actions to increase their productivity in an efficient way.
 
In the era of automation and artificial intelligence (AI), AspenTech talks of the "self-optimizing plant" that can use Industrial AI technology to enable companies to make plants increasingly autonomous and optimize across functions.
 
After a strong "beat & raise" June quarter report (their Q4 for FY20), analysts raised estimates significantly for FY21 and are forecasting 23.5% revenue growth to $729 million and 37% earnings growth as the company breaches $5 EPS.
 
Old School Modeling Gets AI Facelift
 
AspenTech is the oldest industrial software company you've never heard of. They got their start over four decades ago modeling chemical processes for oil and gas companies during the energy crisis that began in the 1970s.
 
As their PR video says "Not long after that, we started moving companies away from the dials and knobs and kicked off a digital revolution in the process industries." 
 
AspenTech was put on my radar not merely because of its frequent visits to the upper realms of the Zacks Rank earnings momentum model, but also because of a significant AI acquisition they made almost four years ago. Here was the press release...
 
AspenTech Acquires Mtell
October 27, 2016
 
Will Add Predictive and Prescriptive Maintenance Technology to aspenONE® Software; Extends Company’s Asset Optimization Offerings
Bedford, MA -
 
Aspen Technology, Inc. (NASDAQ: AZPN), a leading provider of software and services to the process industries, announced it has acquired Mtelligence Corporation (known as Mtell), a San Diego, California-based pioneer in the field of predictive and prescriptive maintenance for asset performance optimization.
 
Mtell products enable companies to increase asset utilization and avoid unplanned downtime by accurately predicting when equipment failures will occur, understanding why they will occur, and prescribing what to do to avoid the failure.
 
The products provide a low-touch, rapidly deployable, end-to-end solution that combines a deep understanding of operations and maintenance processes, real-time and historical equipment data and cutting-edge machine learning technologies.  As a result, customers can:
 
Monitor the health of equipment, detect early failure symptoms, diagnose their root-cause and recommend the best responses to avoid the failure
 
Continually learn and automatically adapt to changing equipment and process behaviors
 
Automatically share findings across a network of similar equipment to improve the overall process performance.
 
Some of the world’s largest process manufacturing companies use Mtell software to detect and avoid failures well in advance of an actual breakdown, optimizing the performance of their assets.  Customer results have shown significant benefits including improved industrial safety, removal of risk, reduced failures, enhanced productivity and increased profitability.
 
(end of PR excerpt)
 
The co-founder of Mtell was Alex Bates who performed DARPA-funded research in neural networks as an undergrad, as well as research in memory and computational diagnostics. Next he jumped into the private sector, applying analytics on some of the world’s largest data warehouses at Teradata, a pioneer in big data / MPP database technology.
 
A lead inventor on 3 patents in the area of sensor networks and machine learning, in 2006 Bates co-founded Mtelligence (Mtell) to harness the deluge of sensor data in the industrial IoT, with a mission to create a world that doesn’t break down. Mtell’s machine learning platform is used to monitor global fleets of offshore drilling rigs, railroad engines, and process equipment, in effect creating a distributed immune system to protect equipment and personnel. 
 
The AspenTech website describes a case study where Mtell technology examined pump and compressor assets for a major oil & gas refinery with hundreds of sensors in play at once. Aspen Mtell analyzed 220 million sensor values to identify the top 10 maintenance cost failures and predicted a compressor breakdown 49 days in advance.
 
This is similar to what Alteryx (AYX - Free Report) allowed Royal Dutch Shell to do, helping them create predictive analytics for forecasting asset failures on off-shore drilling rigs.
 
Here's how AspenTech describes the evolution of Industrial AI for modern asset performance management...
 
Traditional preventive maintenance alone cannot solve the problems of unexpected breakdowns. With asset performance management powered by low-touch machine learning, it’s now possible to extract value from decades of process, asset and maintenance data to optimize asset performance.
 
Since Bates was clearly ahead of the curve with machine learning, I'm eager to learn more from him and currently reading his book Augmented Mind: AI, Humans, and the Superhuman Revolution that he published in 2019 through his investment and research firm Neocortex Ventures.
 
Big Beat & Raise Quarter
 
Clearly, the downturn in oil and gas markets impacted AspenTech business and the company had to lower expectations in their Q3 report in May. But you'd never know it looking at what just happened, causing shares to jump from $98 to $128 this month. 
 
On August 12, AspenTech reported Q4 adjusted EPS of $1.54, beating the consensus of $1.18 by 30%. And they delivered Q4 revenue of $199.3M vs. consensus of $176.57M for a .
 
"AspenTech delivered solid fourth quarter results that exceeded expectations in the midst of unprecedented economic conditions," said Antonio Pietri, President and Chief Executive Officer of Aspen Technology. "Customers in our core markets continued to make significant investments in AspenTech products despite the challenges facing their own businesses. Companies in the process and other capital intensive industries increasingly recognize that investing in digitalization initiatives is essential to long-term financial and operational success and we believe we are well-positioned to benefit from this trend."
 
The company also offered outstanding upside guidance with FY21 adjusted EPS projected in a range of $4.78-$5.32 vs consensus of only $3.70 and FY21 revenue of $704M-$754M vs. consensus of $600.43M.
 
One analyst who saw this recovery coming was KeyBanc's Jason Celino who raised the firm's price target on AspenTech to $120 from $110 in May. Celino noted that the company posted Q3 annual spend growth of 9.3% year-over-year and revised its fiscal year 2020 annual spend guidance to 7%-9%, both above his previewed expectations. While the downturn in oil end markets presented near-term headwinds, the analyst was confident in the company's "best in class execution and more durable business model."
 
And so after his thesis about AZPN was confirmed in the June quarter, Celino felt compelled to raise his outlook again. On August 13, he raised his price target on AZPN to $137 from $120. Most impressive to him was the 6%-9% 2021 annual spend guidance, which was much higher than his previewed expectations of 3%-5% year-over-year growth. Celino also pointed out that despite a tough end market backdrop, the company's continued execution reinforces his long-term confidence that Aspen remains a core name to own.
 
While that spend metric is important to the KeyBanc analyst, I'm more focused on the company growth in a total addressable market for big data and machine learning analytics in the tens of billions. AZPN's projected surge of 23.5% in revenues to $729 million this fiscal year will exceed the last TTM peak of $618M by 18%.
 
And the 37% expected jump in profits is just icing on that Industrial AI cake. While the valuation at nearly 12X sales is rich, I would look to be a long-term buyer on pullbacks under $120.
 
Disclosure: I own shares of Alteryx (AYX - Free Report) for the Zacks TAZR Trader portfolio.
 
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