Expanding School Districts And Global Engineering Projects Propel Revenue And Margins

Key Takeaways

• Expansion and investment in education, healthcare, engineering, and aerospace divisions are poised to substantially boost RCM's revenue and EBITDA.
  
• Continuous technology investments, particularly in cybersecurity, are crucial for growth sustainability and avoiding financial losses from security breaches.
  
• RCM Technologies' growth strategies in healthcare, engineering, and education sectors are vulnerable to economic downturns, geopolitical risks, and increasing operational costs.

Catalysts

Provides business and technology solutions in the United States, Canada, Puerto Rico, and Europe.

• Expansion into new school districts with potential for significant revenue growth impacts revenue positively, especially as RCM transitions into the 2024-2025 school year with a record number of new school contracts.
  
• Investment in recruiting and credentialing process efficiency within the Healthcare division, which aims to reduce the time to bring new providers onboard, directly impacts revenue growth by enabling swifter scaling to meet growing demand.
  
• The Engineering division's increased activity and backlog, particularly with large substation projects and international market engagements, is expected to substantially boost revenue and EBITDA through new projects in the U.S. and potential cooperation agreements in Latin America and Europe.
  
• Growth in Aerospace and Defense due to increased headcount, new verticals, and expansion into other divisions with existing aerospace components manufacturers is likely to lead to an uptick in both revenue and net margins.
  
• Continuous investments in technology, especially in cybersecurity and IT infrastructure, while primarily a cost, are essential for safeguarding the company's growth trajectory and maintaining high service standards, potentially impacting net margins by preventing costly security breaches.

Assumptions

• Analysts are assuming RCM Technologies's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 6.6% in 3 years time.
• Analysts expect earnings to reach $22.3 million (and earnings per share of $2.74) by about October 2027, up from $16.7 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 14.7x on those 2027 earnings, up from 10.0x today. This future PE is lower than the current PE for the US Professional Services industry at 27.8x.
• Analysts expect the number of shares outstanding to grow by 2.23% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

Risks

• The reliance on projections that health care and engineering sectors will continue their growth trajectory could be compromised by unforeseen economic downturns or reduced demand in these sectors, potentially impacting RCM's revenue and margins.
  
• Investments in infrastructure, especially in cybersecurity and IT, which are necessary for growth and protection against cyber threats, increase SG&A expenses, potentially reducing net margins if revenue growth does not outpace these investments.
  
• The expansion into international markets, including the Philippines for the recruitment and operational support teams, introduces risks related to geopolitical instability, currency fluctuations, and regulatory challenges, which could affect operating costs and profit margins.
  
• The significant increase in new hires, particularly in aerospace, while indicating growth, also presents the risk of increased labor costs. If the anticipated revenue growth from this headcount increase does not materialize, it could negatively affect profitability.
  
• The focus on acquiring new school districts as a part of its growth strategy could lead to variability in revenue. As mentioned, the exact value from these districts is yet to be determined and there's an inherent risk if these new contracts do not generate expected revenues, which could impact overall financial performance.

Valuation

• The analysts have a consensus price target of $34.0 for RCM Technologies 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 2027, revenues will be $339.1 million, earnings will come to $22.3 million, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 6.5%.
• Given the current share price of $21.86, the analyst's price target of $34.0 is 35.7% 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.