Description

ESI Group is a French software company that sells multi-physics simulation products to the automotive, aerospace, and heavy industry markets.  Its products allow its customers to granularly simulate physical processes and become more efficient when making their goods.  Automotive crash testing is a prime example of this where ESI’s software simulates what happens in a crash and lets the customer avoid the time and cost of physical testing.  Some of its customers have even brought cars to market that did not have any physical crash tests but only simulations.  ESI’s stock is very cheap relative to the other players in its space.  It trades at 3x 2023 sales versus 11x for Ansys, 8x for PTC, 8x for Autodesk, and 8x for Altair. 

ESI is in the midst of a turnaround.  The company was founded by Alain De Rouvray 30 years ago and was run like a family business until his retirement in 2019.  Sales were set up regionally so multiple salespeople could be calling on one customer organization in different regions.  Products were highly customized for each customer with a 1,000-page pricing list for various product features.  Processes were rife with inefficiency and operating margins never rose above 10%.  This is a very low level in a highly profitable industry where Ansys’ operating margins are at 35%.  Sales stagnated at around 140m Euros and growth was hard to come by.  Corporate governance was not a priority and there was not much turnover at the Board level.

In 2019 the CEO reins were passed to Alain’s daughter Cristel De Rouvray.  At first blush this seemed like nepotism and that the company would continue in its current form going forward.  Cristel, however, had different ideas.  She wanted to make the company into an efficient machine that would grow revenue and achieve high operating margins in line with the other software players in the industry.  Her first move was to bring a strong Chairman of the Board who has turnaround experience elsewhere.  Alex Davern was chosen for this position in February 2021.  He was the CEO of National Instruments from 2017 to 2020, a $7 billion market cap public company in the US.  There he improved the operations and made the company significantly more profitable.   

Cristel’s next move was to bring in a new sales head to overhaul the sales organization.  Drawing on Alex’s Rolodex, she chose Francis Griffiths who had formerly been SVP of Regional Sales and Marketing at National Instruments.  His goal at ESI was to centralize the sales group and move to a customer oriented approach where one team of salespeople would call on each customer, no matter where that customer’s divisions were located regionally.  These teams would also focus on upselling and cross selling other products to each customer.  The former unwieldy 1,000-page pricing manual was consolidated into 16 pre-packaged modules which allowed the salespeople to be much more efficient and effective in their work.  The company will admit that selling to new logos continues to be a challenge for it but it can grow to its targets on cross sell and upsell alone and then new logos are upside.   Another goal of management is to form more partnerships with complementary players in the industry.  This will create more sales opportunities as well as chances for a possible sale of the company to one of these players.

ESI sells a number of products for different simulation applications.  It sells “multiphysics” products which means these products simulate a number of types of physical, chemical, and other material interactions to speed up development and reduce costs for its customers.  Its main products are described below.

ProCAST – Casting simulation software.  This product allows customers to simulate the casting process so they can iron out bugs before doing it in reality.  Different casting processes are covered, including sand casting, die casting, and investment casting.

PAM-COMPOSITES – Simulates building products with composite materials.  Can determine both the geometrical and material properties on “as-built” composite products.   Allows for a smooth transfer of manufacturing results to design departments for as built structural analysis.

ACE+ Suite – An advanced CFD and high-fidelity Multiphysics software package including flow, heat transfer, stress/deformation, chemical kinetics, electrochemistry, biochemistry, electrostatics, electromagnetics, hypersonics, plasma, and more.

PAM-STAMP – Stamping simulation software for various metals and alloys.

SimulationX – Single platform for modeling, simulating, and analyzing technical systems, including mechanics, hydraulics, pneumatics, electronics, and controls, as well as thermal, magnetic, and other physical behavior.

VA ONE – Single comprehensive tool for eliminating interior and exterior noise issues before production.

Virtual Performance Solution – Crash and safety simulation software.   This is ESI’s flagship offering to simulate vehicle crashes on all components of the vehicles and their occupants.

IC.IDO – Virtual reality engineering software.

SYSWELD – Enable virtual verification and validation of multi-material joining of industrial structures and assemblies with simulation.

SYSTUS – Reinforce nuclear safety through digital transformation.

PROSIVIC – Virtually integrate perception sensors to verify and validate vehicle intelligence software.

Management outlined a 3-year plan to get growth to 10% and operating margins to 20%.  2022 will probably finish with low-single digit growth and 11% operating margins.  Given the changes at the company and the high barriers to entry there are in the industry there is no reason why they cannot achieve these goals and have margins move even higher as they scale the business.  If they hit their 2025 targets and the business rerates to an industry standard multiple of 8x sales, the stock would then be worth 243 Euros or 221% upside from current levels.  ESI is well known and regarded in the industry and may be a takeout candidate for one of the bigger players.

All information provided herein should not be deemed as a recommendation to buy or sell securities. The opinions expressed are my own and may differ from the opinions of my employer. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed are solely for general informational purposes. Public comments posted on this site are not selected, amended, deleted or sorted in any way. Content posted by third parties is not attributable to me.  

Catalyst

The stock should rerate as positive results come out.  Also there is a real possibility of a takeout over the next couple of years.