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3 reasons why I like Altium Limited (ASX:ALU) shares

Whenever you invest your hard-earned money into a business you need to make sure that you have compelling reasons to do so.

If you aren’t investing in a market-beating business, or a defensive business, that is better than the market then you may as well have just invested in an ultra-low-cost index fund and made everything simpler for yourself.

Here are three reasons why I like Altium Limited (ASX: ALU):

Strong products with big customers

Altium is an electronic PCB software provider. Its customers range from being a one-person client to large teams at big organisations.

Like any piece of software, it takes quite a while to learn everything and become proficient at it. That makes Altium’s customer base ‘sticky’ and means it has high recurring revenue as it can add more features to each new iteration of its products.

However, Altium’s competitors could also say their products are sticky. But, in the industry say that Altium has the best product at perhaps the best value.

Altium has an impressive list of clients including Audi, John Deere, Toyota, BMW, Volkswagen, Bosch, Daimler, NASA, Boeing, BAE Systems, Cochlear Limited (ASX: COH), ResMed Inc (ASX: RMD), Dolby, Bose, Bang & Olufsen, Microsoft, Lenovo, Belkin, HP, Siemens, CSIRO, CERN, Monash University and many more. These are the businesses that will be driving the future of the world forward.

Delivering excellent numbers

In the half-year result a few months ago it revealed revenue growth of 30%, earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 51%, net profit after tax (NPAT) growth of 51% and earnings per share (EPS) growth of 50%.

The EBITDA margin increased to 30% from 25.8% the year before, management have a medium-term goal of a 35% EBITDA margin.

Any business in the world would be pleased with these numbers and management are predicting that there could be a lot more growth to come with the ‘Internet of Things’ becoming a larger part of our lives.

Growing income stream for shareholders

You may think of most tech companies as being unprofitable, or at least being unlikely to pay a dividend as they normally re-invest most of that profit back into the business.

Altium has increased its dividend each year since 2012 at an impressive pace. In the half-year result alone it increased the dividend by 18% to 13 cents per share.

The current dividend yield of 1.22% won’t win any ‘dividend share’ prizes, but it’s a start and the income could continue growing at a fast pace.

Foolish takeaway

There are other reasons to like Altium, such as its attractive balance sheet, the recent Trump tax cuts and so on. However, the key risk is its valuation – it’s trading at 41x FY19’s estimated earnings. This is expensive even with its expected growth over the coming years.

I would really like to buy more shares, however there is a decent chance it won’t be a market-beater over the next one or two years because of the high price. If it dropped to $16 or below after reporting then I’d be likely to buy for the long-term.

Another top growth business that I’m looking to buy more shares of is this top growth share which is expanding in Asia and is predicting profit growth of 30% this year.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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