Aspen Technology: Downgrading to Underweight and Lowering Estimates on Oil Impact

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Aspen Technology: Downgrading to Underweight and Lowering Estimates on Oil Impact

January 22, 2015

Underweight

Today we are downgrading Aspen to Underweight from Neutral to account for the impact of oil trading below $50. We believe at these levels demand is seeing an impact as we watch companies in the oil industry starting to lay off workers. Our new estimates cause our DCF-based price target to come down to $36 from $46.50. 

·         Oil below $50 should impact demand. The previous CEO of Aspen talked about oil prices in the mid $60s having a negative impact on demand, while the current CEO on last quarter’s call said sustained pricing in the $40s would cause an impact. Based on current oil prices, recent layoff reports, and conversations with customers and competitors we believe demand is taking a hit. 

·         Oil industry layoffs provide negative backdrop. We have seen a number of oil-related companies announce layoffs of varying sizes, and while AZPN does not have customer concentration to any of these specific companies we believe the news is indicative of what is happening in the space. 

·         Oil prices expected to remain low through 2015 and 2016. J.P. Morgan commodity research is now forecasting oil to stay below $50 in 2015 and below $60 in 2016, indicating a slower recovery in prices that may provide a diminished backdrop for spending on solutions from Aspen. 

·         Two factors make this dip more difficult to analyze. In the last major dip in January 2009 Aspen saw bookings growth dip toward the mid single digit level (measured as TCV at that time), but at that time there was a shifting business model and go to market changes in process. This time around the overall domestic economy is better and it could be argued that the cost of producing oil is lower so we may not see as much of a slowdown in production. This is why our annual customer spend growth forecast bottoms at 8% and not 6%. 

·         Lowering our price target to $36. Our price target is based on our DCF using a 12% discount rate and 2% terminal growth rate, and implies an EV/FCFF multiple of 18x on FY16.