Kinaxis has even more growth to come; Analysts see 55% upside potential


Kinax (EAST: KXS) is a Canadian provider of software solutions for sales and operations planning (S&OP) and supply chain management. The company’s flagship product RapidResponse is offered on the cloud.

Its capabilities include consequence assessment and warning, accountability-based collaboration, high-speed analysis, and scenario simulation. Kinaxis’ S&OP solution capabilities include supply and demand planning, capacity and inventory planning, and inventory management.

The company has a measurable competitive advantage and strong analyst support.

Quantify a competitive advantage

There are several ways to quantify a company’s competitive advantage using only its income statement. The first method is to calculate the Earning Power Value (EPV) of a company.

The value of earning power is measured as after-tax adjusted EBIT divided by the weighted average cost of capital (WACC), and the value of reproduction (the cost of reproducing/replicating the business) can be measured as the using the total value of a company’s assets. If the earning power value is greater than the reproductive value, then a firm is considered to have a competitive advantage.

For Kinaxis, the calculation is as follows:

EPV = Adjusted Earnings EPV / WACC

$660 million = $54 million / 0.083

Given that Kinaxis has a total asset value of $571 million, we can say that it has a competitive edge. In other words, assuming no growth for Kinaxis, it would take $571 million in assets to generate $660 million in value over time.

The second way to determine if a company has a competitive advantage is to look at its gross margin, as it represents the premium consumers are willing to pay over the cost of a product or service. An expanding gross margin indicates that a sustainable competitive advantage is present.

If a company does not have an advantage, new entrants will gradually take market share, which will cause the gross margin to decline over time due to price wars.

In the case of Kinaxis, its gross margin has remained relatively stable for most of the past decade, but has declined in recent years, from 71.9% in fiscal 2019 to 67.5% in the past few years. last 12 months. Therefore, its gross margin indicates that a competitive advantage is not really present in this regard.

However, this could be a temporary problem caused by inflationary pressures such as higher wages. Thus, the company might be able to improve its gross margin in the future.

The rule of 40

One metric I like to look at when evaluating SaaS companies is the rule of 40, which is calculated as revenue growth plus free cash flow margin. Companies with numbers above 40 tend to outperform those with numbers below 40.

For Kinaxis, this metric sits at 32.7% – below the benchmark. However, it is worth mentioning that Kinaxis has fluctuated above and below 40% over the past decade. Indeed, it was above 40% four of the last 10 years.

Although the current reading is 32.7%, there is a possibility that this number could exceed the benchmark in the future, as analysts forecast free cash flow growth of 156% and 51% in 2022 and 2023, respectively.

Analyst Recommendations

Kinaxis has a Strong Buy consensus rating based on six purchases awarded over the past three months. The average KXS stock price target of C$215 implies 54.7% upside potential.

Final Thoughts

As a supply chain software provider, Kinaxis is in an interesting position to benefit as companies look for more efficient ways to manage the ongoing disruptions. Additionally, it has a measurable competitive advantage and the backing of analysts, who anticipate significant free cash flow growth in 2022 and 2023.



Comments are closed.