Autodesk (NASDAQ:ADSK): Downgrade to Hold: Slowing Rate of Improvement Driven by EMEA - Jefferies

Jefferies is downgrading Autodesk (NASDAQ:ADKS) to Hold from Buy with a $31 price target (prev. $37).

Firm notes their recent channel work points to deceleration in EMEA, while North America remains strong. They are comfortable with their F2Q11 (July) ests and renewed Euro strength will help F3Q11 (October). But they think EPS revisions will moderate and the stock is unlikely to achieve a premium multiple under that scenario.

Key Points
Downgrading to HOLD as EMEA Trends Weaken. Jeffco's most recent survey/ checks point to some deteriorating demand in EMEA, while North American remains strong. EMEA is 40% of ADSK sales and therefore difficult to ignore. The data is not terrible, but it has paid to take note of inflections historically (e.g. negative in 01/08, positive in 07/09). Jefferies had also predicated their view on positive EPS revisions, which they now think will moderate.

No Change to F2Q11 Ests, Slight Raise to F3Q11 Given FX. Firm's survey work suggests 2% seq license growth for the July Q. After adj. for the April Q price change and for an est 3% negative seq impact from FX, their July ests remain broadly unchanged at rev/ NG EPS of $455M/ $0.26 vs Street at $456M/ $0.27 and guidance at $445-460M/ $0.25-0.28. Their survey suggests better sequential license for NA in F3Q11 vs a decline for EMEA, leading to a low single digit blended rate of growth. But at prevailing rates FX will add 1-2% to seq growth. As a result, they have bumped their October Q ests from $454M/ $0.29 to $468M/ $0.30 vs Street at $461M/ $0.29.

Improvement Trends are Moderating. Jefferies' channel survey data shows signs of moderation in the rate of change of improvement. LT growth expectations ticked down and around 1/2 the resellers saw improving overall demand trends versus 3/4 last survey.

Also Added Costs to FY12 to Reflect Merit Increases. They increased FY11 costs to reflect a small opex increase for merit payments that we think could be reinstated next year. This also modestly negatively impacts their FY11 EPS estimate and brings us more in-line with consensus on EPS.

Valuation/Risks
Jeffco's $31PT (from $37) is based on the stock trading on 17X our FY12 (CY11) EV/NOPAT at the end of FY11 (CY10) plus $6 net cash/ share. This multiple is broadly in line with the multiple for their group, and is lower tha prior 20X as they now have lower conviction on upside surprises to EPS. Key risks include the pace of new license sales recovery and the need to increase costs as rev growth increases.

Notablecalls: Jeffco's Systems Software team has made some good calls on ADSK in the past (e.g. negative in 01/08, positive in 07/09), which leads me to think today's call will get some attention. The target cut is also fairly hefty.