MorningWord 3/13/15: Swiss Autobanking – $LXFT

by Dan March 13, 2015 9:35 am • Commentary

Last night on CNBC’s Fast Money we had the CEO, Dmitry Loschinin, of Swiss software company, Luxoft (LXFT) on the program.  To be 100% honest I have never even heard of the company prior to him stepping foot on the set but considering the stock’s 28% year to date gains and the fact that the stock is up 100% from the 52 week lows, it’s obvious that some investors are familiar with the LXFT story.  Watch the interview here:

What struck me as interesting was the differences in the company’s software development as they seem to be attacking two big growth areas, autonomous cars and regulatory reporting for financial companies like Deutsche Bank (DB).  It seems like these two verticals could be the gift that keeps on giving considering how nascent the driver-less car segment is, and what seems to be a never ending regulation of large financial institutions.

It’s inevitable that comparisons to other companies like MobilEye (MBLY) in the connected / autonomous car space will help sentiment on LXFT, given the fact MBLY trades at 40x expected 2015 sales of $220 million.  LXFT trades at 3x fiscal 2015 sales which will be about $520 million, sporting only a $1.6 billion market cap compared to MBLY’s $8.6 billion market cap. But not all sales are created equal as LXFT’s gross margins are about 43% vs MBLY at 73%. But still.

As the rally in tech shares continues, and large U.S. multi-nationals struggle with the question of what to do with their growing cash balances, aside from share buybacks, and given how much of this cash is sitting overseas, unusable for share-buybacks, I suspect that foreign acquisition targets could become a scarce and hot commodity.  While I have just begun to look at LXFT, I am hard pressed to think that they would not be a great tuck-in acquisition for a company like ORCL, specifically for the regulatory reporting component of their business, but also an entrée into a fast growing space like the connected car. I suspect global automakers are already a huge customers for ORCL and let’s not forget ORCL’s proclivity to acquire software companies that don’t immediately appear to be a great fit.

LXFT recently broke out to new all time highs, and I am not sure chasing it up here makes a ton of sense, but a pull back to the mid to low $40s could be an ideal long entry for a high growth stock that trades at a very reasonable earnings multiple (trades 19x expected fiscal 2016 earnings growth of 19%).  This one is on my radar.

LXFT 1yr chart from Bloomberg
LXFT 1yr chart from Bloomberg