Strengthening Shareholder Value With Record Revenues And Tactical Investments

Key Takeaways

• Emphasis on expanding product suite and high-growth areas like alternatives fund administration suggests robust future revenue growth and market share increase.
  
• Prioritizing shareholder value through significant share buybacks and focusing on innovation and efficiency implies positive earnings impact and long-term competitive advantages.
  
• Dependence on acquisitions, seasonal performances, and stock repurchases, coupled with technology investment risks and regulatory challenges, may hinder earnings and long-term growth.

Catalysts

Provides software products and software-enabled services to financial services and healthcare industries.

• The record adjusted revenue and the highlighted strength in the alternatives, GIDS, Wealth, and Investment Technologies, and Intralinks businesses suggest a robust and expanding product suite, which is likely to drive future revenue growth.
  
• The company’s significant share buyback activity, including the highest share buyback in one quarter in SS&C's history and the renewed 1-year $1 billion common stock repurchase program, indicates a strong commitment to enhancing shareholder value, which could positively impact earnings per share.
  
• SS&C's focus on the alternatives fund administration business and the successful growth across private markets, hedge funds, and retail alternatives highlight the company's positioning in high-growth areas, potentially increasing its market share and impacting future revenues.
  
• The mention of driving efficiency and increasing productivity as part of the financial outlook suggests a focus on improving net margins through disciplined expense management and operational leverage.
  
• The narrative around refining product development and customer engagement strategies, especially around newer technologies like DomaniRx and Blue Prism, indicates a forward-looking investment in innovation and technology to secure competitive advantages, driving long-term growth in revenues and potentially expanding net margins.

Assumptions

• Analysts are assuming SS&C Technologies Holdings's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.3% today to 15.9% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $4.25) by about September 2027, up from $698.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $854.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2027 earnings, down from 26.0x today. This future PE is lower than the current PE for the US Professional Services industry at 28.3x.
• Analysts expect the number of shares outstanding to decline by 1.08% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

Risks

• The company's optimism around acquisitions could lead to overpaying for targets in a market where valuations are still considered elevated, potentially impeding earnings if the expected synergies and returns do not materialize.
  
• Dependence on seasonal performance variations, as seen in the GIDS business, could lead to fluctuations in quarterly revenues and earnings, making the financial performance more volatile and uncertain.
  
• The heavy emphasis on stock repurchases as a use of capital, while beneficial in the short term, may limit the company's ability to invest in long-term growth opportunities, potentially affecting revenue growth and innovation.
  
• The technology focus, including investments in Blue Prism and other advanced technologies, while potentially a long-term strength, carries execution risk and requires sustained investment. Failure to achieve expected returns from these technologies could negatively impact net margins.
  
• Regulatory and cybersecurity risks inherent in financial and technology sectors, with an increased focus on security and compliance, could lead to significant unexpected expenses, impacting earnings if the company needs to make substantial investments to meet these challenges or recover from breaches.

Valuation

• The analysts have a consensus price target of $81.91 for SS&C Technologies Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $92.0, and the most bearish reporting a price target of just $65.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.5 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 6.8%.
• Given the current share price of $73.92, the analyst's price target of $81.91 is 9.8% 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.