New Vendor System And Sales Process Will Improve Efficiency

Key Takeaways

• Efficiency gains from a new vendor system and cost-cutting measures are enhancing margins and earnings for Quest Resource Holding.
  
• Strategic refinancing and asset disposal improve Quest's financial health, focusing on core operations for sustained growth.
  
• Quest faces execution challenges with temporary cost increases, client attrition, and system transitions impacting margins, revenue, and overall financial performance.

Catalysts

Provides solutions for the reuse, recycling, and disposal of various waste streams and recyclables in the United States.

• Quest Resource Holding expects to achieve significant efficiency gains from its new vendor management system, which will lead to cost reductions and potentially higher net margins.
  
• The company has transitioned to a more disciplined, results-oriented sales process, which has already resulted in an increased pipeline and record client wins, suggesting potential future revenue growth.
  
• Quest's ongoing initiatives to reduce costs, coupled with operational improvements and the integration of technology, are expected to enhance end-to-end business efficiency, positively impacting net margins and earnings.
  
• Recent debt refinancing has led to a reduction in interest expenses by approximately $1 million annually, which should improve net income and cash flow, contributing to bottom-line growth.
  
• The expected disposal of non-core assets, such as the tenant direct mall business, will allow Quest to focus on its core operations and possibly improve its revenue mix and profitability.

Quest Resource Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Quest Resource Holding's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.2% today to 1.0% in 3 years time.
• Analysts expect earnings to reach $3.6 million (and earnings per share of $0.16) by about April 2028, up from $-15.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 52.7x on those 2028 earnings, up from -2.8x today. This future PE is greater than the current PE for the US Commercial Services industry at 29.0x.
• Analysts expect the number of shares outstanding to grow by 1.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.55%, as per the Simply Wall St company report.

Quest Resource Holding Future Earnings Per Share Growth

Risks

• Quest faces execution challenges, having not consistently converted growth into margin and profit growth, impacting net margins and earnings.
  
• Temporary cost increases due to onboarding, client attrition, and weakness in industrial markets have affected financial results, impacting net margins and revenue.
  
• Delays in client onboarding and higher cost of sales to maintain service during system transitions have temporarily increased expenses, impacting earnings.
  
• Attrition, particularly related to clients in the industrial and mall sectors, coupled with soft market conditions, has led to significant revenue declines.
  
• Noncash adjustments and issues with accounts payable from previous years have negatively impacted financial results, affecting earnings and shareholder value.

Valuation

• The analysts have a consensus price target of $6.833 for Quest Resource Holding 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 $345.2 million, earnings will come to $3.6 million, and it would be trading on a PE ratio of 52.7x, assuming you use a discount rate of 9.5%.
• Given the current share price of $2.07, the analyst price target of $6.83 is 69.7% higher.
• 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.