ESI Group SA (EPA:ESI) is providing automakers with virtual prototypes that allow auto companies to run thousands of tests without incremental costs, and though ESI is participating in a growing niche and making over $1 million per prototype, the stock is still well below the radar of most investors, says Joshua B. Stewart, Portfolio Manager at Wasatch Advisors.
“[ESI] creates software that all the automakers use to do things like crash tests. It is virtual prototyping and crash testing. It costs a lot of money, often more than $1 million, to make a prototype of a new car model. Volkswagen (FRA:VOW) is ESI’s biggest customer, and using a prototype made virtually with software, you can run thousands and thousands of tests without any incremental costs…It saves a lot of money for the automotive companies,” Stewart said.
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Stewart believes that ESI has a key asset that its customers cannot live without at this point, as automakers look to phase out physical prototypes and save money. ESI has been under-the-radar for most investors, yet has many characteristics that make it an attractive investment, Stewart says.
“Its customers are figuring out even more ways to use its tools as they try to reduce the physical prototypes as much as they possibly can, and that saves them money. In the financial crisis, ESI didn’t lose any of its big key customers,” Stewart said. “It is an asset that is really attractive, it’s not going anywhere, and someone could easily look to acquire. It is in a really nice growing niche that people are going to use more and more, and it’s trading at 1.25 times EV to sales. So it is much cheaper than its global peers.”
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