This Company Provides Constructive Assistance To Its Customers

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There are two fatal mistakes that you could make with a high flying growth stock. One of the mistakes is that future growth prospects are over-rated; another mistake is that the company does not have the ability to fend off competition from competitors also seeking to participate in this growth. You are not making the same two mistakes with this stock. Listed in June, Textura (NYSE: TXTR) is a provider of software-as-a-service, or SaaS, solutions such as collaboration and productivity tools for the commercial construction industry.

Rome was not built in one day

Using technology to improve efficiency sounds like a broken record, and most people assume that most companies and industries are already fairly advanced in that area, but research from Gartner suggests otherwise. While financial institutions typically spend about 6% of their sales on IT, construction companies only allocate about 1% of their revenues to IT spending, suggesting lots of potential for Textura to increase its penetration rate in the construction market.

There are two major factors driving the increased usage of IT for the construction industry in the near future.

Firstly, not every company in any industry benefits from IT in the same way and to the same degree. It is intuitive that the benefits of IT are more visible when it comes to industries that are inherently more complex, both in terms of participants and documentation. This is the case for construction projects, where developers, general contractors, subcontractors, architects, banks, insurance companies and other parties are involved at various stages of the projects. In the entire process, lots of information needs to be recorded, transmitted and stored, where IT will be a great enabler.

Secondly, the removal of inefficiencies through IT becomes more important when cost management is a key issue for companies in that particular industry. The construction industry is cyclical in nature and construction margins are usually quite modest. Against this backdrop, any efficiency gains extracted from IT implementation will go a long way in enhancing margins.

Textura provides a common platform for different parties to share information and data, with the resulting cost efficiency flowing to the bottom line for construction companies in the form of improved margins.

More than a single moat

Textura derives its competitive advantages from more than one moat.

Intangible assets such as patents equip companies with pricing power and the weapons to defend against copycat competitors. Textura currently has 40 granted patents and allowed applications and 52 additional patents pending with various countries’ patent offices. These patents generally relate to the payment and document management for construction projects.

Textura boasts of having one of the largest network of construction industry professionals such as general contractors, subcontractors and suppliers, through its website GradeBeam.com. Similar to social networking sites, market leaders like Textura, with a lion’s share of the user base, become stronger, snuffing out the competitive threat from new entrants.

General contractors use GradeBeam to post details of their projects and search for subcontractors and suppliers to partner with; subcontractors and suppliers use the platform to keep themselves updated of public construction opportunities via email and fax. According to a Constructech article, Textura has more than 200,000 construction professionals in its database, which benefit as the network gets bigger.

Growth drivers

Textura grew its annual revenues by 74.7% and 106.2% respectively to $10.5 million and $21.7 million for fiscal 2011 and 2012 respectively. With half-year revenue for the six months ended March 31 already reaching the $15.3 million mark, Textura is poised to register another high double digit revenue growth rate for fiscal 2013. There exists ample opportunities for Textura to grow further.

Besides increased market penetration, along with more companies allocating a greater proportion of revenues to IT expenditures, the growth in the construction industry is also expected to be positive for Textura’s business. Industry experts forecast the global construction industry to grow from $7.2 trillion to over $12 trillion by 2020. In addition, it is not difficult for Textura to replicate its business model across different industries and countries. It has already had experience venturing outside of the U.S. with a presence in Canada and Australia & New Zealand since 2009 and 2012 respectively.

Peer comparison

Textura’s peers include Workday (NYSE: WDAY) and ServiceNow (NYSE: NOW)

Workday is a provider of enterprise cloud applications for human resources and financial management, with a focus on larger companies with more than 1,000 staff members. The outlook for its core human resources system, managing details of staff, is more positive, with a CedarCrestone 2012–2013 HR Systems Survey forecasting Workday to triple its market share from 3% to 10% over the next 12 months.

Workday delivered a good set of results for the first quarter of fiscal 2014, growing subscription revenues by 85% year-on-year to $68.4 million. Despite this, I am concerned about big boys like Oracle and SAP making inroads into cloud with acquisitions and other players like ADP introducing competing products.

ServiceNow provides cloud-based services automating enterprise IT operations to its clients. It had an outstanding first quarter for fiscal 2013, with revenues and billing increasing 81% and 88% year-on-year, respectively, to $85.9 million and $110.3 million. Management guided for full year fiscal 2013 revenue to grow about 62% on an annual basis to $394-$398 million.

ServiceNow is targeting to reach $1 billion in sales by fiscal 2016, by retaining and upselling existing customers, and increasing the penetration rate of the Forbes Global 2000 market. Retention rates and upsell rates remain decent at 96% and 33% respectively for the most recent quarter, while it is adding about 18 new Forbes Global 2000 customers every quarter. While ServiceNow’s exposure to Europe and financial services companies at 25% and 11% of revenue, respectively, are not particularly large, these are the areas posing the most significant risks to revenue downside.

Conclusion

A growing market with low penetration rates coupled with a competitive position protected by moats makes for a great investment candidate like Textura. However, with its current share price double that of its IPO price of $15, Textura is expensive at 25 times trailing twelve months enterprise value/revenue. 

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