Industrial Weakness Will Squeeze Earnings But Spur Margin Recovery

Key Takeaways

• Operational and digital improvements may boost efficiency and retention, but near-term profitability faces pressure from client demands and a competitive environment.
  
• Growth opportunities exist due to ESG trends and urbanization, yet customer concentration and industrial market cycles limit revenue consistency and scalability.
  
• Persistent industrial market weakness, margin pressures, slow client additions, and high customer concentration heighten Quest's revenue volatility and threaten long-term growth prospects.

Catalysts

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

• While Quest is beginning to see operational improvements through process automation, vendor negotiations, and workflow optimization that should support future growth in free cash flow and net margin, these initiatives still require additional time to fully reshape the company's profitability, leaving the business exposed to ongoing margin pressures from client contract renewals and rising cost reduction demands.
  
• Although expanding relationships with existing customers and onboarding new large accounts creates opportunity for steady revenue and gross profit dollar growth as ESG and sustainability demands intensify, the company's results remain heavily influenced by cyclical industrial end markets, with persistent volume weakness and slow sales cycles limiting near-term topline expansion.
  
• While heightened regulatory requirements and accelerating corporate sustainability targets should secularly expand Quest's addressable market for outsourced waste management, the company continues to face pronounced customer concentration risk, and failure to replace lost volumes from divested or declining industrial business could pressure revenue consistency and scalability.
  
• Even though investments in digital platforms and analytics are expected to streamline waste stream management and provide long-term customer retention benefits, the complex competitive environment and lack of clear scale advantages may limit Quest's ability to consistently command favorable pricing, weighing on future net margin improvement.
  
• While urbanization, waste generation, and the pressure for supply chain traceability may drive increased demand for Quest's resource management solutions over the longer term, fluctuating commodity prices and the challenge of demonstrating differentiated value over integrated competitors could continue to create volatility in earnings and constrain reliable operating leverage.

Quest Resource Holding Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Quest Resource Holding compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Quest Resource Holding's revenue will decrease by 3.0% annually over the next 3 years.
• The bearish analysts are not forecasting that Quest Resource Holding will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Quest Resource Holding's profit margin will increase from -9.3% to the average US Commercial Services industry of 7.0% in 3 years.
• If Quest Resource Holding's profit margin were to converge on the industry average, you could expect earnings to reach $17.3 million (and earnings per share of $0.83) by about August 2028, up from $-25.3 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 3.7x on those 2028 earnings, up from -1.4x today. This future PE is lower than the current PE for the US Commercial Services industry at 30.2x.
• Analysts expect the number of shares outstanding to grow by 1.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.33%, as per the Simply Wall St company report.

Quest Resource Holding Future Earnings Per Share Growth

Risks

• Revenue has declined significantly year-over-year and sequentially, largely due to persistent weakness in the industrial end market, and management expects continued uncertainty and volume headwinds in this segment, posing a risk to future top-line growth and revenue stability.
  
• Gross margin pressure is apparent as clients, especially in the industrial sector, focus more on cost reductions during contract renewals, forcing Quest to accept lower upfront margins with uncertain timing and magnitude for optimization, which could result in sustained or increased margin compression and lower net earnings.
  
• The pace of new client additions has slowed compared to the prior year, with longer sales cycles and greater economic uncertainty causing delays in closing deals, potentially limiting Quest's ability to offset attrition and drive revenue and profit growth in the near to medium term.
  
• The company's ongoing high customer concentration is evident, as the loss or reduced volume from its largest customers materially impacts overall results, exposing Quest to revenue volatility and further risk if additional large clients scale back or leave.
  
• Despite process improvements and operational efficiency gains, Quest's financial outlook remains tied to the cyclical nature of its customers' industries; if automation and waste minimization continue to trend upward, the company could face a shrinking serviceable market over time, pressuring long-term revenue and earnings growth.

Valuation

• The assumed bearish price target for Quest Resource Holding is $2.25, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Quest Resource Holding'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 $4.0, and the most bearish reporting a price target of just $2.25.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $246.8 million, earnings will come to $17.3 million, and it would be trading on a PE ratio of 3.7x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of $1.7, the bearish analyst price target of $2.25 is 24.4% 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.