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Motley Fool Issues Rare “All In” Buy Alert

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The phrase "recession-proof stock" has different meanings to different investors. Some would say that subscription businesses fit the bill, while others might say they are companies that provide something critical to people's survival, or sellers of products and services that consumers would never think of cutting. However, it all boils down to how companies perform during challenging periods.

One company that deserves the recession-proof description is Autodesk (ADSK -1.61% ) . It provides the computer-aided design (CAD) software that engineers and architects use daily to do their jobs. Before Autodesk and its peers created their products, designs and blueprints were drawn by hand. Now, many firms that employ engineers or architects has a subscription to Autodesk or one of its competitors. And in my view, Autodesk belongs in every investor's portfolio.

Among Autodesk's primary products are AutoCAD, Revit, and Inventor. These programs are staples in the industry, and engineering and architecture students learn how to use them in school. However, the company offers nearly 100 different products, including some that don't fall into the engineering or architecture niches.

Autodesk is expanding the use of its tools into media and entertainment, which increases its sales in two ways. First, it allows engineers and architects to bring their designs to life through high-quality renderings and animation. This visualization can be valuable when pitching a design for a building to customers or presenting a new design to management, for example. By catering to this audience, Autodesk gains the opportunity to expand the number of its products that its clients subscribe to.

Second, Autodesk's media products bring in a clientele that wouldn't have considered using any of its other offerings --  video game designers, visual effects teams, animation studios, and the like. That's expanding its potential customer base -- which is excellent for its investors.

There are obvious reasons for investors to like companies that are dominant in their primary niches and also expanding into other areas with similar potential. But such stocks may not be worth an investment if the company can't execute during challenging economic periods.

Luckily for prospective investors, Autodesk crushed it during its fiscal 2023 second quarter, which ended July 31.

In its fiscal Q1 report, management projected that fiscal Q2 revenue would land between $1.22 billion and $1.235 billion. It exceeded expectations, delivering revenue of $1.237 billion. Its core business, the "design" side (think architects and engineers), took in revenue of $1.06 billion, up 15% year over year. The company's "make" segment is much smaller, with only $113 million in revenue, but that figure was up 26%.

Furthermore, though there were fears a recession was in the cards, Autodesk's customers didn't act like it. Its U.S. revenue rose 22% in Q2. Its results in the Asia-Pacific region were the weakest, with only 10% sales growth.

On the bottom line, Autodesk produced a solid 20% operating margin and delivered earnings per share of $0.85, up from $0.52 in the prior-year period. Autodesk also repurchased $708 million in stock in the quarter. That more than offset its stock-based compensation, causing the number of outstanding shares to drop.

Let's recap. Autodesk beat expectations, grew rapidly in a region where the economy was expected to be shrinking, increased its profits, and repurchased shares. There's not a whole lot more investors could ask for.

Still, investors can lose money on even a great company's stock if they pay the wrong price for it.

Even though Autodesk is profitable, its trailing 12-month price-to-earnings ratio is currently meaningless, as it had one quarter (fiscal Q4 2022) during which a one-time charge messed up this metric. Therefore, I'm judging the company based on its price-to-free-cash-flow ratio. Compared to another content-creating company like Adobe, Autodesk is trading at a reasonable valuation.

ADSK Price to Free Cash Flow data by YCharts

Given that Autodesk's stock is reasonably valued, I think investors should seriously consider buying into this critical company. It still has plenty of room to grow, and because it provides vital products for core occupations, it commands serious pricing power.

Just because Autodesk's stock is reasonably priced now doesn't mean it always was. Investors who purchased this stock at the beginning of the year are down 27% (although this is less than Adobe's 34%). At around 45 times cash flow at the beginning of the year, Autodesk's stock was priced for perfection and unrealistic results. Now, the stock has returned to a valuation level where investors can be confident the downside is limited.

I think Autodesk is an excellent purchase for any investor. If you're willing and able to hold the stock for at least three to five years, I don't think you will be disappointed in your returns.

Keithen Drury has positions in Adobe Inc. and Autodesk. The Motley Fool has positions in and recommends Adobe Inc. and Autodesk. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe Inc. and short January 2024 $430 calls on Adobe Inc. The Motley Fool has a disclosure policy.

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