The Biden administration recently introduced a $2.3 trillion spending plan to upgrade the nation's infrastructure over the course of the next decade. As you might expect, there is a lot of ground covered in a spending proposal this big -- just over 10% of the $22 trillion GDP the U.S. is expected to report in 2021. Among the target industries that would get a cash influx under the yet-to-be-approved plan, some $280 billion is earmarked for highways, bridges, public transit, freight and rail; $100 billion is for eclectic grid upgrades; $213 billion is for affordable housing and existing housing upgrades; and $300 billion is for manufacturing and small business.
There are a lot of companies that could benefit from this epic influx of cash, but software is one of the most profitable players in any construction or manufacturing project. Thus I think Autodesk (ADSK -0.52%), Ansys (ANSS 0.74%), and PTC (PTC -0.12%) are three top stock buys if you are looking to capitalize on an American infrastructure spending boom.
1. Autodesk: The name synonymous with CAD
Autodesk -- the company behind AutoCAD -- is far and away the world's largest computer-aided design (CAD) software company. Long a staple of architects and engineers, Autodesk facilitates a wide range of CAD applications these days. With a broad spectrum of customers, this is a top software play on a big boost to the U.S. infrastructure budget in the next decade.
Construction management is one area of particular interest for Autodesk. Its BIM 360 construction cloud suite is picking up lots of new contractor clients, and it helped contribute to a 16% increase in total revenue to $3.79 billion last year. That's an impressive total considering how disruptive the pandemic was. Even with many projects sidelined last spring and summer, Autodesk makes an incredibly sticky and essential product for its users.
The Biden administration's infrastructure proposal includes $111 billion to eliminate lead pipes from America's water infrastructure and cap old oil and gas wells and abandoned mines. Interestingly, Autodesk announced in late February that it had acquired water infrastructure design and management software firm Innovyze for $1 billion. That's prescient timing given some of the targets of the proposed federal funding.
Even excluding the takeover, Autodesk is forecasting its revenue will increase at least 13% this year, and free cash flow should be at least $1.58 billion, good for a free cash flow profit margin of at least 37%. At over 48 times trailing 12-month free cash flow, this is no cheap stock. However, with sales still chugging higher at a consistent clip and the company using its high rate of profitability to expand in new directions, Autodesk is a well-diversified company that could benefit in multiple areas if the U.S. starts to funnel trillions into next-gen infrastructure.
2. Ansys: Engineering simulation for the most complex processes
One of the incredible capabilities software unlocks is the ability to simulate engineering models in a virtual world. Physics engines have been built that allow designers to visualize what might happen to the objects and materials they devise in the real world. This has paved the way for a type of trial-and-error process without the high cost of conducting actual real-life experiments.
Enter Ansys, a suite of engineering simulation software. It's already started its recovery from the pandemic doldrums: Full-year revenue increased 11% to $1.68 billion in 2020, including a 28% jump in Q4 as spending in the economy started to normalize again after the initial shocks of the pandemic last spring and summer. Much like its peers in the software design space, Ansys is also a highly profitable outfit. It generated a 34% adjusted net profit margin last year, and 30% free cash flow profit margin. Ansys uses this steady stream of cash to acquire smaller peers to boost its platform's capabilities. There are ongoing headwinds related to the pandemic and tensions between the U.S. and China that are adversely affecting customer renewals, but the company is nonetheless forecasting a 6%-to-11% increase in sales in 2021.
Why Ansys now? After all, shares are trading at an elevated 62 times trailing 12-month free cash flow as of this writing, putting it at a premium to many of its peers. Nevertheless, Ansys should keep steadily expanding, as it is enabling the design of all sorts of new products and solutions. Its software plays a role in areas as varied as semiconductor material design, autonomous vehicle sensor development, battery and electric motor simulation, and medical device and healthcare treatment development -- all of which are poised to receive funding if the infrastructure plan passes in its current form.
This creates a long pipeline of steady growth for Ansys over the next decade, and its high profit margins will enable it to make timely purchases of other software firms to bolster its suite of engineering solutions. For investors who want to bet on trends like the space economy, electric and autonomous vehicles, and semiconductor technology advancement, Ansys is a way to play at a very early stage in the design process.
3. PTC: CAD and the industrial "Internet of Things"
Manufacturing is another realm of growing interest. The Biden plan has $300 billion earmarked for manufacturing and small businesses, plus another $100 billion in workforce development and $180 billion in related research and development to help Americans get educated for a new industrial era powered by technology. PTC could be a top way to bet on both manufacturing tech and this workforce development.
PTC offers a suite of CAD software geared toward manufacturers. In fact, it struck a partnership with Ansys back in 2018 to integrate simulation into its 3D design software. PTC's services also help bring manufacturers into the cloud computing age, connecting machines and workers on a single management platform. Its CAD software integrates with additive manufacturing systems (and 3D printing) to quickly bring engineering creations to life. And an augmented reality platform can help deliver information to frontline employees to increase operational efficiency and provide on-the-job training. PTC is thus a key ingredient in making the industrial "Internet of Things" movement a reality.
PTC posted fiscal year 2020 revenue growth of 16% (to $1.46 billion) and followed it up with year-over-year Q1 2021 growth of 20% (to $429 million). Free cash flow was $310 million over the last trailing 12-month stretch, a free cash flow margin of 20%. The company ended Q1 with $399 million in cash and $1 billion in debt, and it financed the acquisition of product lifecycle management software firm Arena Solutions with another $600 million in debt after the end of the last quarter. The company will need to reduce its liabilities, and it operates at a lower margin than Autodesk or Ansys. However, this is still a top high-growth name in the manufacturing world.
PTC's stock currently trades for a steep 55 times trailing 12-month free cash flow, but the company is forecasting at least a 16% increase in revenue and about a 60% increase in free cash flow in 2021. With new federal funds aimed at bringing the manufacturing sector up to speed with the technological times, PTC is definitely worth considering at this juncture.