Lectra embraces emerging markets and ‘Industry 4.0’ for future growth

By fully embracing the concept of ‘Industry 4.0’, or the fourth digital led industrial revolution, French textile cutting software and hardware systems provider Lectra is positioning itself for strong growth in the years to come. With rapidly growing revenues diversified across the fashion, automotive, furniture, and other industries coming from Europe (42%), Asia (26%), the Americas (25%), and 7% coming from other countries, the company has an enormous growth runway.

The company’s management believes that ambitious growth objectives would be met by focusing its business on the increasing impact of millennials, digitalisation, China, and Industry 4.0 in its target industries.

First of all, with two billion millennials playing an increasingly prominent role in economic decision making, Lectra is investing in ensuring its products appeal to their tastes in order to win and retain an increasing share of their business.  

Secondly, China is already the largest economy in the world by purchasing power parity and is rapidly gaining on the United States in terms of GDP. As the manufacturing center of the world and a concentrated push on developing advanced technology in industry, China’s economy is a fertile market for manufacturing-oriented software companies to pursue business as Lectra is doing, especially in the automotive, textile, and fashion businesses due to China’s burgeoning middle class. 

Thirdly, digitalisation is becoming an increasingly dominant theme across the global economy, fueled by the move towards data analytics. As a result, Lectra is pushing its software R&D towards compatibility with that approach. Finally, and most importantly, Lectra is ensuring its products facilitate Industry 4.0 by enhancing ‘smart factories’ – making them indispensable to customers seeking a competitive edge in the 21st century. 

The most encouraging aspects of a potential investment in Lectra at this point are the cheap price of its stock (down 25% from 52-week highs), its vast global presence which can facilitate rapid scaling and economic resiliency, and its commitment to grow revenue allocations to R&D by 50% between 2016 and 2019.

These factors could combine to generate outsized returns if management can execute on its plans to grow revenues by 6%-12% annually on an organic basis while improving profit margins similarly. The R&D investments and global presence (with a particular focus on emerging trends - i.e., leather - in rapidly growing economies like China) should facilitate the revenue growth while economies of scale should rapidly improve profit margins (since R&D and global office costs are fixed, scaling drastically improves profit margins in this type of business).

While the path to growth and enhanced profitability is clear and appears attractive, there are a couple of significant risks to consider here. 

First, this field is highly competitive and subject to intellectual property theft, particularly when focusing on a market like China. Competitors with much deeper pockets will be chasing the same contracts as Lectra. 

Second, basing the growth strategy and R&D on the tastes of consumers, faces significant risk that preferences could change quickly, potentially wasting millions in R&D spending. 

Lectra’s success will ultimately come down to its execution, as well as a little bit of good fortune. The stock looks attractive here, but investors need to remember that it is highly speculative.