In a regular market where everything’s going wrong, Kinaxis Inc. does everything right.
The Canadian cloud software company has surged 147 per cent this year, the best-performance among 232 companies with market values of more than $1 billion. That’s as opposed to the 12 per cent plunge in the nation’s benchmark equity gauge, that has been pummeled with a commodity rout.
While Canadian factory owners struggle with globalization, Kinaxis is feeding off the trend by selling software to assist companies manage their increasingly complex global supply chains. It’s nipping at the heels of larger rivals for example Germany’s SAP SE and it has an important edge on other Canadian tech darlings like Hootsuite Media Inc. and Shopify Inc.: it’s forecast to create a profit this season.
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“We’ve always cared about profitability,” John Sicard, 53, chief product officer and soon-to-be chief executive office from the Ottawa-based company said inside a phone interview. “Call us traditional.”
Kinaxis has been around since the 1980s and rolled out the merchandise that has become its prime supply-management application – RapidResponse – in the 1990s. The tool helps multinational corporations simulate changes for their logistics and determine the easiest method to respond if, for example, a person doubles a purchase unexpectedly.
Since its stock market debut in June 2014, the organization has posted revenue growth every quarter except one. Sales are forecast to rise 28 percent in 2015 and adjusted profit 79 percent, based on estimates compiled by Bloomberg. All seven analysts who rate the organization say buy it to have an estimated 18 percent profit from its close of $45.74 on Wednesday. It’s already more than tripled from the dpo cost of $13 per share.
While policy makers have been puzzled by Canada’s faltering manufacturing exports even while the currency has weakened, the likes of Kinaxis that rely on intellectual capital could be the way of the future, according to Benjamin Tal, an economist at CIBC World Markets. Canadian factories have shed about 600,000 jobs since peaking in 2002 with little sign of a pick-up even as the Canadian dollar has declined by 15 percent in the last year.
“Manufacturing lost capacity and the new capacity which will emerge will be a completely different capacity that we will not be able to measure,” Tal said in a telephone interview. He explained it will be valued-added “as well as in many different ways be invisible.”
Investors already are betting around the trend, driving the S&P/TSX Information Technology Index to a 12 per cent advance this year. Kinaxis has led the pack, as investors place a premium on its profitability. The organization employs approximately 300 people, compared with 700 for Hootsuite, the Vancouver-based social networking startup that’s been touted as an IPO candidate, and Shopify, a cloud-based commerce company with more than 500 workers, based on its website.
The prospect of an eventual takeover with a larger tech company like SAP or Oracle Corp. helps raise the stock, Robert Young, a Toronto-based analyst with Canaccord Genuity said by phone.
“They’ve done a very good job of winning mandates over SAP,” he explained. “They’re taking away software as a service revenue.” Kinaxis is simply too small to cause its bigger competitors any real problems at this time, but when it is growing and eating to their market share it might be a takeover target for SAP, Young said.
A spokesman for SAP declined to comment.
Sicard said his company’s edge on competitors including SAP may be the design of his software, with a focus on communication and simulation.
“I don’t believe we actually compete with them on product,” said Sicard, citing his company’s capability to simulate situations. “Many can’t do at all what we should do.”
While a takeover from a larger competitor is possible, so is the possibilities of SAP or Oracle building out a product to more directly compete with Kinaxis, said Bruce Campbell, a fund manager at StoneCastle Investment Management in Kelowna, Bc, that has owned the stock since May.
“They’ve come from not even turning up on those guys’ radar screens to now all of a sudden I’m sure there’s several sales guys which are like, ‘Oh man, Kinaxis just took another deal from us’,” Campbell said.
That possibility of increased competition and Canadian investors moving their cash back to energy stocks on a rebound from the slump are risks Kinaxis is facing, Campbell said. He still sees the company growing for 3 to four years though.
The company’s intends to keep posting growth include building out a “partner ecosystem” with consulting companies like Accenture Plc, Sicard said. That will put pressure on margins for the short term, but profitability will still remain a goal, he said.
“We’re likely to govern ourselves the way in which we’ve always governed ourselves,” Sicard said.