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Our top stock for 2016 may not be a household name, but its software is fundamental to the design and manufacture of a myriad of electronic devices. Everything from a Cochlear, (ASX:COH) bionic ear, to a HP computer and even the electronic systems in a BMW. It’s a highly specialised area, and thanks to the increasing proliferation of electronic devices and componentry, one that is growing fast. It’s our firm belief that shareholders in Altium (ASX: ALU) are likely to be rewarded over time. Simply read on for all the details on Altium, our top pick for 2016!

 Altium (ASX: ALU)

  • Company snapshot (data as of 6 October, 2015)
  • Market cap: $602 million
  • Recent share price: $4.76
  • Cash/debt: $81 million / $0.14 million
  • P/E: 38.2

Why Buy?

  • Steady growth combined with new product launches
  • Rock-solid balance sheet and strong pricing power
  • Global diversification and high levels of recurring revenue

What Altium does

Altium has a flexible and expanding (more on that in a second) suite of software which allows engineers to design Printed Circuit Boards (PCBs) — the intricate tangle of wire and plastic that form the heart of modern day electronic components.

Altium’s software is used by everyone from NASA to a nutty hobbyist, helping to design everything from a bionic ear, to a bird feeder. It’s a highly specialised area, and thanks to the increasing proliferation of smart connected devices, one that is growing fast.

Why Invest?

Altium has grown revenues at an annualised rate of 12% per year for the past 5 years, and we expect it to continue growing for many years to come.
A huge 93% of Altium’s total revenue is generated outside of Australia. This is incredibly attractive from a portfolio perspective when we consider some of the headwinds that the broader Australian economy is facing.

#10_Altium Global Diversification
The global diversification makes for a reliable income stream and close to half the money rolling in Altium’s front door comes from subscription revenue. Even if new customer growth slows, the company can still bank on a large share of its revenue being sustained.

Strong Management

CEO Aram Mirkazemi may have only held the top job for a little under two years, but he has a long and successful association with the company.
Mirkazemi’s key strengths are his technical prowess and depth of industry experience. Both of these make him well suited to the CEO role for a fast-growing tech company such as Altium.

Risks and when to sell

A subscription model does provide a good deal of certainty for Altium, but the other half of revenues that come from one-time license sales would suffer in any global economic slump. Potential clients are likely to just make do with existing systems in tough times — a phenomenon Altium learnt first-hand during the GFC, and made worse thanks to some ill-considered pricing decisions by the then management team.

One of Altium’s strengths – operating leverage – can also become a weakness. If there was another global slowdown that leverage would work in reverse: a modest fall in revenue would mean a much larger decline in operating profits.

Technology can change quickly and there are other well-heeled and experienced operators in this space that are just as determined to gain market share. A serious misstep with a new product release could motivate customers to look elsewhere for their PCB design needs.

The Foolish bottom line

Altium ticks a lot of boxes for us at The Motley Fool. The company’s growth prospects, global diversification, and durable core business all make it an attractive foundation stone for our portfolio.

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Last updated: 6 October 2015

This report was prepared by Scott Phillips and Catherine Baab-Muguira, and authorised by Bruce Jackson. This report contains general investment advice only (under AFSL 400691).  Please refer to our Financial Services Guide (FSG) for more information.  Employees and contractors of The Motley Fool, may have an interest in any shares mentioned in this free report. These interests can change at any time. The Motley Fool has a clear and concise disclosure policy.

Any and all advice contained in the above content is general advice that has not taken into account your personal circumstances. Before you act on the general advice we provide, please consider whether it is appropriate for your personal or individual circumstances. Please refer to our Financial Services Guide for more information or email us at [email protected] to request a copy.

Please remember that investments can go up and down. Past performance is not necessarily indicative of future returns.

All returns cited are hypothetical and based on the percentage change between the stock price at the time of recommendation and the current or sell price (if the position has been closed) at the time of publication. Brokerage, taxes and any other associated costs are not taken into account. Please remember that investments can go up and down. Past performance is not necessarily indicative of future returns. Performance figures are not intended to be a forecast and The Motley Fool does not guarantee the performance of, or returns on any investment. Any money back guarantee is strictly limited to the subscription price paid for the product. All figures are accurate as of 6 October 2015. Any and all advice contained in the above content is general advice that has not taken into account your personal circumstances.