Acquisition Of Marcum Will Expand Service Offerings, Create Synergies, And Position As Seventh Largest US Accounting Firm

Key Takeaways

• The Marcum acquisition expands CBIZ's market position, enhancing service offerings, increasing revenue, and improving net margins through operational leverage.
  
• Strong client demand and strategic M&A opportunities are expected to drive future revenue growth, expanding service lines and geographic presence.
  
• Integration expenses, seasonal losses, and potential key personnel departures could impact CBIZ’s margins, revenue growth, and financial stability by increasing cost and earnings cyclicality.

Catalysts

Provides financial, insurance, and advisory services in the United States and Canada.

• The acquisition of Marcum, a transformational transaction, is expected to create synergies and expand CBIZ’s service offerings, positioning the company as the seventh largest accounting firm in the U.S. and boosting both revenue and earnings.
  
• Strong demand for CBIZ's services and its ability to implement price increases are expected to drive revenue growth, reflecting ongoing strong client demand and favorable market conditions.
  
• The expanded scale and capabilities from the Marcum acquisition are expected to improve operating leverage, potentially enhancing net margins over time as the company capitalizes on its larger market presence.
  
• A robust pipeline of mergers and acquisitions (M&A) opportunities is anticipated to support future revenue growth, with strategic acquisitions aimed at further expanding service lines and geographic presence.
  
• Integration with Marcum is expected to generate $25 million or more in synergies over the next three years, which could positively impact earnings by reducing costs and improving efficiency.

CBIZ Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CBIZ's revenue will grow by 27.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $336.4 million (and earnings per share of $4.56) by about April 2028, up from $41.0 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 22.3x on those 2028 earnings, down from 101.4x today. This future PE is greater than the current PE for the US Professional Services industry at 20.8x.
• Analysts expect the number of shares outstanding to grow by 5.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

CBIZ Future Earnings Per Share Growth

Risks

• The integration of Marcum into CBIZ may result in significant onetime transaction and integration costs, which could impact near-term earnings and cash flows as these expenses are incurred.
  
• There is a risk that the seasonal nature of the Accounting & Tax business could lead to amplified seasonal losses, particularly in the fourth quarter, thereby impacting net income and margins.
  
• The departure of key producers, as seen in the Property & Casualty insurance group, could lead to reduced revenue growth and margin pressures if similar attrition occurs in other regions or service lines.
  
• The combined entity might face challenges that could delay realizing expected synergy opportunities, thereby impacting anticipated EBITDA growth and operating margins over the next three years.
  
• The increased concentration of core tax and accounting services could lead to heightened cyclicality in earnings, potentially affecting cash flow and financial stability during periods of lower demand.

Valuation

• The analysts have a consensus price target of $98.5 for CBIZ 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 $3.8 billion, earnings will come to $336.4 million, and it would be trading on a PE ratio of 22.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of $78.69, the analyst price target of $98.5 is 20.1% 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.