Dassault Systemes Earnings Likely to Ride Out Any Post-Election Storms in France
France’s hotly contested presidential election is behind us, now, and while the victory of Socialist candidate Francois Hollande (on a platform that included not only higher government spending but higher taxes to finance that spending) has left investors uneasy. The good news for Dassault Systemes (DAST.PA) is that the company has reduced its exposure to this unstable enviroment, as the percentage of its total revenues it earns from its market-leading software solutions and consulting business in France itself has fallen from 36% in 2009 to 25% in 2010 to only 20% in 2011. Dassault Systemes shouldn’t be mistaken for Dassault Aviation (AVMD.PA) , a civil and military aircraft maker that until 1981 was the only client of Dassault Systemes, its sister company. Dassault Aviation just won a $10 billion defense deal to provide India with French Rafale fighter jets, and although Dassault Systemes has diversified its roster of clients worldwide, Dassault Aviation still is among them, so it may end up as one beneficiary of that big order.
The demand for Dassault Systemes’ services is strong enough for the company to earn the highest possible StarMine Earnings Quality score of 100 , indicating that the company’s earnings come from sustainable sources and are likely to remain strong in the future. This examination of Dassault Systemes’ earnings is the final one in a series of six that scrutinize the earnings quality of companies across Europe that rank either especially high or low by our quantitative measure. As we have noted previously, StarMine uses computer-driven models to analyze the financial statements of thousands of publicly traded companies, and to calculate a proprietary StarMine Earnings Quality (EQ) scores for each of those businesses. Those companies recording the highest StarMine EQ scores are the most likely to be able to sustain their past earnings track record. (For a more detailed explanation of this model, please refer to this recent article about the earnings quality of American Express.)
As can be seen in the chart above, Dassault Systemes’ net income has been rising steadily since 2008 and hit a record €160 million in the last reported semi-annual period, ended December 31, 2011. The company’s cash flow from operations (CFFO) tends to be higher in the first half of the year than the latter half as its contracts have a cyclical structure, leading to a concentration of accounts receivable in the second half of the year. Even taking that into account, it is clear that CFFO is increasing steadily. The green sections of the bars in the chart above represent the degree to which the company’s CFFO exceeded its net income. For most companies, that pattern is a strong signal that they can boast high earnings quality. Such a pattern implies that earnings are being driven by operations, and that those operations are generating strong cash flows that adequately cover investments that will, in turn, drive future growth.
One measure by which investors judge the companies in which they invest is the ability of the latter to generate profits on invested capital. At Dassault Systemes, the key ratio of profitability is the company’s operating profit margin, which helps us understand the competitive position of the company in the market and can be used as a proxy for management performance. Operating profit margins at Dassault Systemes (represented by the blue line in the chart on the left, above) have been rising since June 2009 and hit a record of 24.5% in December 2011. In contrast, the rest of the industry (represented by the gold line) has seen margins remain largely flat throughout that period, while the industry median operating profit margins have fallen to 17% from 19% over the course of the last two years. In contrast, those of Dassault Systemes have continued to increase, rising from 20% to 25%. The chart on the right, above, shows that the company has seen strong growth in its revenues, which reached a record €945 million in the semiannual period ended December 31, 2011. Coupled with strong margins, that is a strong indicator that Dassault has a high degree of earnings sustainability.
Dassault Systemes is in the process of completing its $360 million acquisition of Gemcom Software International, a transaction that will give the company exposure to the mining industry, further diversifying the business areas from which it derives its revenues and profits. The company has more than enough cash on its balance sheet to finance that transaction, and the acquisition will help Dassault Systemes to further increase its revenues.
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