Sailing will Never be the Same

When I first heard of Ansys (ANSS), a major software provider of engineering simulation software and services used by engineers and designers in the aerospace, automotive, manufacturing, electronics, biomedical, and defense industries, I was just thinking about egghead-like, boring CAD/CAE software that only 5 PhDs in the world know how to use. Well the PhD part may be fairly true, but the boring part is not.

It can possibly be said that Ansys simulation software was critical to winning the America's Cup. The yacht designs of both finalists used "finite element analysis" modeling to most efficiently determine the stiffness distribution design of the yacht and mast and "computational fluid dynamics" modeling to increase the boat's speed. The company and winning design team claimed that more than 150,000 labor hours went into analysing the power generated by the sails, the drag produced by the boat's hull and the air resistance of the deck.

By using Ansys software, very small changes in these areas can make the difference between winning and placing second. Multiphysics simulation has shown that hulls, masts and keels clearly are not rigid and behave differently under varying and extreme hydrodynamic conditions.

But it is not just about yachts. This software has basically evolved to the point where it can offer "full virtual prototyping," whereby the costly steps of designing, building and testing physical prototypes can be eliminated. The software can simulate thermal and electromagnetic conditions as well as mechanical stress and fluid dynamics (combined functionality the company calls "multiphysics"). It has been used for the Space Shuttle and for designing stents for opening closed arteries and in modeling the respiratory system for developing new methods to treat asthma. The company really does have a lot of ideas where their software can be used.

The only things holding them back is execution and distribution. Although the applications are exciting, the company is not selling iPods. This is complex software being sold to a very conservative engineering crowd, so I don't expect this stock to be a rocket.

The good news is that they give quarterly and yearly guidance and consistently produce results. Earnings are expected to grow at a 20% clip over the next five years and I think those numbers are conservative.

Analysts are expecting the company to deliver on an EPS of $1.12 on $376 million in revenue for 2007. This are estimates that were just upwardly revised after good Q3 results. Next year, analysts expect an EPS of $1.38 on $436 million in revenue. This 16% organic revenue growth should continue to improve gross margins. This gives the stock a forward 2008 PE of 29 and a PEG of 1.45 (not bad for a software company).

Technically, the chart looks great, as the stock is resting in a range between $41.50 and $38. Any move above $41.50 on good volume and I plan to buy in force. At this point, I may also nibble right here to have a marker because things on my watch list sometimes get missed during the heat of a busy trading day.