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3 reasons why Altium is a buy at this share price

Tristan Harrison
Altium share price

Altium Limited (ASX: ALU) is one of the best businesses on the ASX in my opinion.

But, one of the main things that people say about Altium is that it is too expensive. It’s true, it certainly isn’t cheap at 58x FY19’s earnings.

However, I think it could still be a buy for these three reasons:

Free cash flow

In FY19 the company generated US$63.9 million of free cash flow compared to net profit after tax (NPAT) of US$52.9 million. In FY18 it generated free cashflow of US$44.9 million compared to NPAT of US$37.5 million.

If you value Altium against its free cash flow it doesn’t look quite as expensive, particularly when you value other growth shares against their free cashflow rather than their reported earnings.

I think this metric always shows how wonderfully profitable Altium is. It’s also building a large cash pile. During FY19 it added almost US$30 million to its cash balance to end at US$80.5 million.

Strong growth

If one business grows profit by 3% a year and the other grows by 25% a year it’s obvious you’d pay more for the faster growing business.

Altium grew its NPAT by 41% during FY19, it grew 33% in FY18 and it grew 22% in FY17. Not only is Altium growing quickly but it’s accelerating.

I’m certainly not expecting growth of 33% or more every year for the next decade, but the company expects to grow revenue to US$500 million by 2025 thanks to the rapid growth of the Internet of Things, so there could be a lot more profit growth to come.

Worth paying for quality

Australian interest rates have been pushed down by the RBA to a record low of 0.75%. All assets are priced higher when interest rates are low, particularly really good ones.

In this environment I think Altium is worth its high price, although it would have been better to buy shares earlier in the month when the share price was under $32.

Foolish takeaway

Altium is trading at 40x FY21’s estimated earnings. I think this is just about the most I’d want to pay for Altium shares, but I think it can go on to quite handily beat the market over the next few years. 

The post 3 reasons why Altium is a buy at this share price appeared first on Motley Fool Australia.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019