The Workday Partnership And Pricing Adjustments Will Streamline Operations

Key Takeaways

• Strategic partnerships and benefits re-pricing aim to boost sales growth and align costs, potentially improving revenue and net margins.
  
• Client retention and cost management are expected to stabilize or enhance profitability despite economic uncertainties.
  
• Rising benefits costs and economic policy uncertainties risk pressuring Insperity's margins and revenue growth by complicating client acquisition and retention.

Catalysts

Engages in the provision of human resources (HR) and business solutions to improve business performance for small and medium-sized businesses primarily in the United States.

• Insperity is implementing a strategic partnership with Workday, including a go-to-market plan which targets a large underserved mid-market. This initiative is expected to drive new sales growth and potentially double Insperity's mid-market sales production over time, positively affecting revenue.
  
• Insperity is addressing higher-than-expected benefits costs by initiating pricing adjustments, which should help align pricing with costs by January 2026, potentially improving net margins.
  
• Strategic changes in benefit plan design and packaging are being evaluated to mitigate rising healthcare costs, which could lead to reduced operating expenses and improved profitability in 2026.
  
• Client retention is at the high end of the historical range, which, combined with ongoing marketing efforts generating double-digit increases in business opportunities, supports stable or increasing customer base, positively affecting future revenue and earnings.
  
• Insperity continues to streamline operating expenses, with expectations to keep them below 2024 levels, thereby supporting consistent or improved net margins despite macroeconomic uncertainties.

Insperity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Insperity's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.9% today to 1.5% in 3 years time.
• Analysts expect earnings to reach $116.6 million (and earnings per share of $2.71) by about May 2028, up from $63.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.8x on those 2028 earnings, down from 39.0x today. This future PE is greater than the current PE for the US Professional Services industry at 21.2x.
• Analysts expect the number of shares outstanding to decline by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.73%, as per the Simply Wall St company report.

Insperity Future Earnings Per Share Growth

Risks

• Higher-than-expected benefits costs, primarily from medical claims, could continue to exert pressure on net margins and impact profitability.
  
• Uncertainty around the impact of new administration's economic policies led to delayed or canceled client starts, potentially affecting revenue growth.
  
• The macroeconomic environment caused a significant pause in decision-making among small and midsized business clients, which could negatively impact revenue growth if client acquisition and onboarding are further delayed.
  
• Elevating benefits costs have resulted in increased pricing targets, which could lead to challenges in retaining existing clients or acquiring new ones, potentially affecting revenue and net margins.
  
• Despite efforts to manage operating expenses, the investment in the Workday strategic partnership could strain future earnings, especially if the anticipated joint offering does not meet expected adoption rates.

Valuation

• The analysts have a consensus price target of $77.25 for Insperity 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 $85.0, and the most bearish reporting a price target of just $70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.8 billion, earnings will come to $116.6 million, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 6.7%.
• Given the current share price of $65.34, the analyst price target of $77.25 is 15.4% 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.