Legacy Mail Decline Will Erode Margins Despite Digital Upside

Key Takeaways

• Declining demand for traditional mail and slow transition to SaaS services threaten margins and expose the company to operational inefficiencies.
  
• Rising compliance costs and aggressive digital competition challenge the scalability and future growth of Quadient's high-margin digital business.
  
• Quadient's SaaS expansion, digital leadership, parcel locker growth, and prudent financial practices are driving recurring revenue, margin improvement, and long-term earnings resilience.

Catalysts

Provides digital, mail, and lockers for customers through digital and physical channels in North America, France, Benelux, the United Kingdom, Ireland and Germany, Austria, Italy, Switzerland, and internationally.

• Rapid ongoing digitalization and the shift to paperless communication continue to erode demand for Quadient's core Mail business, resulting in a persistent decline in one of the company's legacy revenue streams while the pace of Mail revenue contraction (minus 2.5 percent organically in 2024, with a continued expectation of a minus 3 percent CAGR) threatens the company's total top-line growth and net margins over the coming years.
  
• The company's slow transition from a fixed-cost-heavy hardware model to SaaS-based services leaves it exposed to falling mail volumes, making it difficult to resize operations quickly, thus further compressing net margins and risking negative operating leverage as profitability in Mail rapidly deteriorates.
  
• Increasing regulatory, data privacy, and compliance burdens add both cost and uncertainty to cloud-based document management and customer communications, raising R&D and compliance expenses and threatening margin expansion in the Digital segment, which is expected to be the biggest contributor to future earnings.
  
• Aggressive competition from agile, cloud-native digital communications and customer experience firms compresses pricing power and increases the risk that Quadient's platforms may be technologically leapfrogged, leading to higher customer acquisition costs, elevated churn, and ultimately slowing or reversing growth in the high-margin Digital business.
  
• Technology budgets at enterprise clients are shifting towards integrated automation platforms, undermining demand for standalone mail, document, and parcel management solutions from established vendors like Quadient; this long-term industry transition threatens sustainable revenue and earnings growth across all of Quadient's business lines.

Quadient Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Quadient compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Quadient's revenue will decrease by 0.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.1% today to 7.5% in 3 years time.
• The bearish analysts expect earnings to reach €83.7 million (and earnings per share of €2.43) by about July 2028, up from €66.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, up from 8.4x today. This future PE is lower than the current PE for the GB Tech industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 1.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.02%, as per the Simply Wall St company report.

Quadient Future Earnings Per Share Growth

Risks

• Quadient's rapid shift towards a subscription-based, SaaS model has led to strong recurring revenue and expanding EBITDA margins, positioning the company for improved earnings sustainability and growth, which could drive higher net margins and predictable revenue over the long term.
  
• The Digital business is delivering sustained double-digit subscription and ARR growth, supported by recognized leadership in the fast-expanding customer communication management and automation market, suggesting future revenue and EBITDA expansion driven by favorable secular digital adoption trends.
  
• Parcel Locker deployment and adoption are accelerating in both the US and Europe, supported by successful strategic partnerships and acquisitions, opening new growth vectors as e-commerce parcel volumes increase, thus potentially boosting total group revenue and segment profitability.
  
• Mail and Locker solutions are evolving toward automation and digital integration, outperforming market declines in traditional mail while leveraging cross-selling into a large, satisfied customer base, which may offset headwinds and support stable or rising segment contribution to overall EBIT.
  
• Quadient's robust financial management is demonstrated by consistent dividend growth, share buybacks, debt refinancing, and disciplined capital allocation, all of which indicate confidence in free cash flow generation and earnings growth, contributing to share price resilience and long-term shareholder returns.

Valuation

• The assumed bearish price target for Quadient is €16.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Quadient's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €29.0, and the most bearish reporting a price target of just €16.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €1.1 billion, earnings will come to €83.7 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 12.0%.
  
• Given the current share price of €16.58, the bearish analyst price target of €16.5 is 0.5% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.