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November 1, 2019

Should You Be Buying Kinaxis (TSX:KXS) After Earnings?

By Dan Kent

November 1, 2019

Popular Canadian tech company Kinaxis (TSX:KXS) reported third quarter earnings yesterday and the market has reacted well to a solid quarter as the stock has saw an increase of 10.5% in early market trading. It’s definitely not uncommon for share prices to accelerate if earnings estimates are beat.

Kinaxis is a mainstay on our list of the best Canadian stocks, and has traded relatively flat throughout 2019. Starting the year off in the $88 range, the company needed this boost from third quarter results to sit at a gain of 5% over the course of 2019. Lets take a look at some details from its most recent earnings report.

Kinaxis (TSE:KXS) third quarter highlights

The bright spot in Kinaxis’s third quarter report was mainly its ability to grow SaaS (Software as a Service) revenue. SaaS revenue is up 28% year over year as the company acquired some new major customers including British American Tobacco, Honda, Yamaha Motors and Teva Pharmaceuticals.

Adjusted EBITDA is also up 29% year over year, making up 26% of revenue. This is very close in line with the company’s guidances of EBITDA making up 27-29% of revenue.

Profits of $4.5 million, or $0.17 per diluted share was largely in line with analyst estimates and represents 70% year over year growth in terms of profit. In terms of revenue, the company topped analyst estimates by 5% with revenue of $47.131 million when $44.75 million was expected.

Profit margins are up to 71% from 67% a year prior, and the company attributes this to strong growth in its SaaS revenue.

The company released new 2019 fiscal targets, including $188-$190 million in revenue, 22% growth in its SaaS subscriptions and $26 million in subscription term license growth. If revenue targets are hit, this would represent 26% growth from 2018.

Should you be buying Kinaxis after its solid third quarter?

Kinaxis has impressed over the last three quarters, beating on top and bottom lines in every time. The company is growing recurring revenue at a significant clip, which is typically more reliable than one off sales and can allow investors and the company to better estimate future revenue.

The company carries very little debt, with $10.35 million on the books and a debt to equity of only 4.82. Compare this to industry peers like Shopify (TSX:SHOP), Constellation Software (TSX:CSU) and CGI Group (TSX:GIB-A) who sit at 3.78, 112.5 and 38.85 respectively.

Quarterly earnings and revenue growth of 70% and 28.8% respectively mark a company who is growing at a decent clip, but its important that investors have a look at what Kinaxis is currently trading at and seeing if its current price justifies its growth.

At this current time, I would say no. The company is trading at nearly 70 times forward earnings and 11.5 times book value. With a 5 year PEG of nearly 10.50, there is a lot of growth priced into this stock.

Analysts have a one year target price on the stock of $74.15, which actually signals nearly 20.5% downside. If Kinaxis can continue to post strong growth numbers moving forward, I could see its price continuing to rise. But if the company were to slip up, we may see a significant drop. If you’re patient, there may be a better entry point for Kinaxis in the future.

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Dan Kent

An active dividend and growth investor, Dan has been involved with the website since its inception. Dan is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. Dan manages his TFSA, RRSPs and a LIRA at Questrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.

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