Refocused Services And AI Integration Will Increase Operational Efficiency

Key Takeaways

• Focus on core services and collaboration with brokers aims for streamlined operations and revenue growth in high-value areas.
  
• Technology investments in AI drive operational efficiencies and cost reduction, targeting improved net margins.
  
• Rising healthcare costs, restructuring challenges, and declining HRIS business threaten future margin stability and revenue growth.

Catalysts

Provides comprehensive and flexible human capital management services for small and medium size businesses in the United States.

• TriNet is focused on improving its insurance services, with new leadership and stronger actuarial talent, to manage insurance costs more effectively, which should improve net margins as insurance costs are brought back into the targeted range.
  
• The company is exiting its HRIS business and focusing on its core PEO and ASO offerings, implying a more streamlined operation and potentially higher net margins through reduced expenses and increased focus on high-value growth areas.
  
• TriNet plans to enhance its sales force by increasing its average tenure and refining its go-to-market strategy, which should drive revenue growth by increasing new business sales.
  
• The company is leveraging technology investments, including AI, to automate and improve efficiencies in customer service and operations, aiming to expand net margins through improved operational efficiencies and reduced operating expenses.
  
• TriNet's strategic shift to collaborate with employee benefit brokers instead of competing with them aims to open new channels for growth, driving revenue improvements by tapping into a larger market of small businesses.

TriNet Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TriNet Group's revenue will decrease by 37.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 20.1% in 3 years time.
• Analysts expect earnings to reach $248.9 million (and earnings per share of $4.92) by about March 2028, up from $173.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $274.8 million in earnings, and the most bearish expecting $223.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2028 earnings, down from 22.8x today. This future PE is lower than the current PE for the US Professional Services industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 2.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.05%, as per the Simply Wall St company report.

TriNet Group Future Earnings Per Share Growth

Risks

• Health care cost inflation and utilization increases are impacting insurance costs, which could suppress future margins if not adequately managed. (Net margins, Earnings)
  
• The exit from the HRIS-only business and potential revenue declines from SaaS-only customers might not be fully offset by ASO revenues in 2025, affecting overall revenue growth. (Revenue)
  
• Attrition is expected to rise, which, coupled with lower new sales due to elevated health cost trends, could lead to volume decreases impacting revenue potential. (Revenue)
  
• A restructuring charge associated with exiting HRIS and other cost optimizations indicates ongoing adjustments that could introduce volatility or unexpected costs. (Net margins, Earnings)
  
• Lower expectations for customer internal employee (CIE) growth and hiring within the installed base due to economic uncertainties could dampen future revenue growth. (Revenue)

Valuation

• The analysts have a consensus price target of $82.75 for TriNet Group 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 $97.0, and the most bearish reporting a price target of just $74.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $248.9 million, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of $79.62, the analyst price target of $82.75 is 3.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.