AI And Cybersecurity Focus Will Improve Efficiency, But Government Segment Challenges May Impact Future Earnings

Key Takeaways

• Divestiture strategy and operational efficiencies aim to streamline Conduent's business, potentially boosting earnings and improving service delivery.
  
• Expansion in Government and Transportation, alongside a focus on cybersecurity, could enhance revenue and client retention.
  
• Conduent faces revenue challenges from contract losses and fragmented portfolio risks, with recovery reliant on better macroeconomic conditions and improved outsourcing trends.

Catalysts

Provides digital business solutions and services for the commercial, government, and transportation spectrum in the United States, Europe, and internationally.

• Conduent's divestiture strategy is expected to streamline their business, enabling them to focus on high-performing assets and improve overall efficiency. This could positively impact earnings through enhanced operational performance.
  
• The company is enhancing its sales strategy by implementing a client partner program to boost wallet share with existing clients, which may drive revenue growth by increasing the range of services provided to each client.
  
• Operational efficiency improvements, including moving additional work offshore and implementing cost-saving technologies like AI, are anticipated to enhance net margins by reducing costs and improving service delivery.
  
• Conduent expects growth in the Government and Transportation segments as volume increases at the state and local levels, particularly in Medicaid administration and unemployment benefit administration, potentially driving revenue growth.
  
• The company’s focus on cybersecurity and GenAI solutions in various business lines, such as fraud detection and customer experience enhancement, is likely to drive client retention and attract new business, thereby aiding in revenue and margin growth.

Conduent Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Conduent's revenue will grow by 7.0% annually over the next 3 years.
• Analysts are not forecasting that Conduent will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Conduent's profit margin will increase from 12.4% to the average US Professional Services industry of 6.3% in 3 years.
• If Conduent's profit margin were to converge on the industry average, you could expect earnings to reach $257.0 million (and earnings per share of $1.98) by about March 2028, down from $416.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.7x on those 2028 earnings, up from 1.1x today. This future PE is lower than the current PE for the US Professional Services industry at 20.9x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.79%, as per the Simply Wall St company report.

Conduent Future Earnings Per Share Growth

Risks

• Conduent's Government segment experienced significant revenue decline in 2024, mainly due to contract terminations, volume reductions, and pricing adjustments, which can negatively impact future revenues if not addressed.
  
• The company's new business Total Contract Value (TCV) was lower in 2024 compared to 2023, primarily due to the absence of a large contract like the one in 2023, which could result in continued pressure on future revenue growth.
  
• The Commercial segment's revenue fell by 3.7% in 2024, reflecting potential ongoing struggles in achieving client expansion and sales growth, which may affect net revenue.
  
• There are risks related to fragmented revenue due to the broad portfolio which management plans to streamline further; missteps in divestiture could impact net margins and delay achieving efficiency gains.
  
• The sentiment that 2024 was a trough year indicates that recovery hinges on future performance, which could face headwinds if macroeconomic conditions change or government outsourcing trends shift, impacting earnings predictability.

Valuation

• The analysts have a consensus price target of $7.033 for Conduent based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.1 billion, earnings will come to $257.0 million, and it would be trading on a PE ratio of 4.7x, assuming you use a discount rate of 9.8%.
• Given the current share price of $2.94, the analyst price target of $7.03 is 58.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.