Investments In Cloud-Native Platforms Will Strengthen Data Segment

Key Takeaways

• Strategic investments and new products like Deluxe Payment and R360+ aim to capture new markets and enhance growth through improved cross-selling.
  
• Cost reductions and cloud-native investments aim to boost growth and improve margins, supporting significant improvement in profit and earnings.
  
• Transition to a subscription model in B2B payments faces challenges amid macroeconomic uncertainty, impacting revenue consistency and margins, with print segment in secular decline.

Catalysts

Provides technology-enabled solutions to small and medium-sized businesses, and financial institutions in the United States and Canada.

• The North Star program aims to increase annualized adjusted EBITDA by $80 million and free cash flows by $100 million by 2026, which could lead to significant profit and cash flow improvements, impacting net margins and debt reduction.
  
• Strategic investments in new products like the Deluxe Payment platform and R360+ should drive future growth and revenue by entering new markets and improving cross-selling capabilities.
  
• Planned reductions in corporate SG&A expenses by 15%-20% by 2026 are expected to improve profit performance and net margins significantly.
  
• Progress in the Data segment and investments in cloud-native platforms are expected to sustain mid
• to high single-digit growth, positively impacting revenue and earnings.
  
• The company expects accelerating revenue growth in Merchant and B2B Payments towards mid-single-digit levels in 2025, which should lead to higher overall revenue and EPS growth.

Deluxe Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deluxe's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 4.7% in 3 years time.
• Analysts expect earnings to reach $102.0 million (and earnings per share of $2.29) by about May 2028, up from $52.8 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 17.4x on those 2028 earnings, up from 13.1x today. This future PE is lower than the current PE for the US Commercial Services industry at 27.7x.
• Analysts expect the number of shares outstanding to grow by 0.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.73%, as per the Simply Wall St company report.

Deluxe Future Earnings Per Share Growth

Risks

• Revenue headwinds, including some segment-specific challenges, have modestly impacted topline growth, posing a risk to revenue and earnings growth.
  
• Ongoing macroeconomic uncertainty, leading to unusual quarter-to-quarter variation across businesses, poses a potential risk to consistent revenue and earnings growth.
  
• The legacy Print business is facing secular declines and increased competition, threatening its revenue and contributing to margin pressures.
  
• The division between discretionary and non-discretionary spending patterns among consumers could cause variability in Merchant segment revenue forecasts.
  
• The B2B payments segment is undergoing a transition to a subscription-based model, which involves challenges including potential delays in expected revenue growth and potential margin pressures during the transition period.

Valuation

• The analysts have a consensus price target of $29.0 for Deluxe 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 $33.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.2 billion, earnings will come to $102.0 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 10.7%.
• Given the current share price of $15.5, the analyst price target of $29.0 is 46.6% 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.