The Curious Case of Autodesk: Cashflow Up, Stock Price Down

Autodesk, Inc. (NASDAQ:ADSK) provides design software and services to customers worldwide. The Platform Solutions and Emerging Business segment offers AutoCAD software, a customizable and extensible computer-aided design (CAD) application for professional design, drafting, detailing, and visualization in fields ranging from construction to manufacturing, civil engineering, and process plant design; and AutoCAD LT, a professional drafting and detailing software. It has other business segments such as Architecture, Engineering and Construction, Manufacturing, and Media and Entertainment. Autodesk, Inc. was founded in 1982 and is headquartered in San Rafael, California.

PROFITABILITY

The company missed in terms of profitability this past quarter. Investors punished Autodesk on Friday after the company missed second-quarter estimates and warned of a weak current quarter, sending its shares down more than 15%. The company reported earnings of $54.6 million during the second-quarter, down from $71.2 million in the same period last year. Autodesk recorded revenue of $568.7 million, up 4% from 2011, but falling well short of the $593.42 million Wall Street was expecting.

Adjusted EPS for the quarter was $0.48, which narrowly dodged the $0.49 predicted by analysts. Noting continue weakness in Europe and the U.S., the company predicted third-quarter revenue of between $550 million and $570 million and non-GAAP earnings of between $0.40 and $0.45 a share. Wall Street had anticipated current quarter EPS of $0.50 on revenue of $601.2 million.

VALUATION

The stock is trading at a forward P/E of 14.97 times. The price to free cash flow is 18.55 times. Autodesk has a good level of cash but, the stock price declined due to a dip in earnings. However, earnings can be unreliable due to its susceptibility to manipulation. We think Autodesk is still in a position to bring the earnings forward in the succeeding periods.

RECENT NEWS

Analysts expect the stock to hit an average of $34.28 within the year. It is up 2 percent, moving higher following Wedbush initiating coverage earlier with a Neutral rating and $36 price target, suggesting 10 percent of upside. Shares are on a three session winning-streak, four if the stock finishes positive today. – Street Insider 09/14/2012 (ADSK +2.25%)

At the International Broadcasting Convention 2012, September 7 to 11, 2012, Autodesk, Inc. demonstrates the powerful new Flame 20th Anniversary Edition software. The new software is part of Autodesk Flame Premium 2013, a high-end software toolset that integrates visual effects, editorial and real-time color grading. The new edition streamlines complex tasks and improves speed with a new creative workspace, top-level editorial timeline integration and an enhanced GPU pipeline. – 4-traders 09/13/2012 (ADSK +4.69%)

RECOMMENDATION 

It is difficult to buy or sell ADSK at this point due to its bearish activity in spite of robust financials. Its earnings are well at a 35.09 percent increase within the year. But, the company is hurdling a tough quarter which led to a decline in stock valuation. The financial position is solid overall but income has can use a little more push.

Thus, our option play is:

SELL ADSK STOCK (BEARISH CALL SPREAD)

SELL OCT 19 34 CALL FOR $0.8 and BUY OCT 19 35 CALL FOR $0.4

Target Gain $0.4 Stop Loss $0.5