Divestiture And New Leadership Promise Growth Amid Revenue And Profit Margin Concerns

Key Takeaways

• Divestiture and focus on offshore service delivery are expected to improve margins by reducing capital intensity and operational costs.
  
• New leadership and enhanced cross-selling in healthcare and other sectors could drive revenue growth by improving sales performance and client retention.
  
• Continued revenue challenges and negative cash flow may impact earnings and growth, compounded by contract losses and potential divestiture effects on net margins.

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 anticipated to improve its balance sheet and reduce capital intensity, which could lead to improved net margins as the company becomes more nimble and focused on growth.
  
• The hiring of new key leadership positions is expected to drive growth across commercial and government sectors by strengthening relationships and improving sales, potentially impacting revenue positively.
  
• The company's operational focus on increasing offshore service delivery to improve cost efficiency is likely to enhance net margins by reducing operational costs.
  
• Conduent's strategy to leverage its diverse portfolio and enhance cross-selling opportunities in commercial segments suggests a positive outlook for revenue growth, especially in sectors like healthcare.
  
• Ongoing efforts to reduce client churn and improve sales performance, coupled with a strong sales pipeline in the commercial sector, are projected to support revenue growth and stability.

Conduent Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Conduent's revenue will decrease by -2.2% 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 6.1% in 3 years.
• If Conduent's profit margin were to converge on the industry average, you could exepct earnigns to reach $200.4 million (and earnings per share of $3.18) by about January 2028, down from $434.0 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 2.8x on those 2028 earnings, up from 1.5x today. This future PE is lower than the current PE for the US Professional Services industry at 25.1x.
• Analysts expect the number of shares outstanding to decline by 26.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.95%, as per the Simply Wall St company report.

Conduent Future Earnings Per Share Growth

Risks

• Continued softness in the Government and Transportation segments due to less deal activity could negatively impact revenue and growth prospects, reducing overall company earnings.
  
• Adjusted revenue decreased by 6% year-over-year, with a notable decline in adjusted EBITDA margin, indicating potential challenges in maintaining profitability margins.
  
• The divestiture strategy, while aimed at streamlining operations, could potentially impact net margins if proceeds are not effectively reinvested to enhance core business segments.
  
• The loss of significant contracts in key sectors, such as the government healthcare segment, highlights potential risks in revenue stability and future earnings.
  
• Expected negative free cash flow, influenced by billing milestone adjustments, could impact financial flexibility and capital expenditure, which might strain long-term earnings growth.

Valuation

• The analysts have a consensus price target of $7.0 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 $3.3 billion, earnings will come to $200.4 million, and it would be trading on a PE ratio of 2.8x, assuming you use a discount rate of 8.9%.
• Given the current share price of $3.97, the analyst's price target of $7.0 is 43.3% 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.