Improving Margins In ACH Segment And Strong Deal Pipeline Will Drive Future Profitability

Key Takeaways

• Usio's expansion in ACH and PayFac segments is enhancing profitability and margins, positioning it for future earnings growth.
  
• Initiatives in Output Solutions and Prepaid drive operational efficiencies, improving overall profitability and net margins.
  
• The company's transition to stable recurring revenue faces risks from program losses, delays, industry volatility, and challenges in strategic acquisitions impacting growth.

Catalysts

Provides integrated electronic payment processing services to merchants and businesses in the United States.

• Usio has the strongest pipeline of signed deals and the largest backlog of pending implementations in its history, which positions the company for future revenue growth as these deals begin to contribute.
  
• The company is experiencing growth in its most profitable segment, ACH (Automated Clearing House), which is expected to gradually improve margins moving into 2025, thereby enhancing net margins and profitability.
  
• Despite replacing $12 million in revenue from a concluded program, Usio is generating new stable recurring revenue and achieving notable profitability improvements, indicating potential for earnings growth.
  
• Initiatives in Output Solutions and Prepaid are driving operational efficiencies and margin improvement, benefiting the overall profitability and potentially leading to higher net margins.
  
• The strategic focus on PayFac revenue growth, with minimal attrition and a robust onboarding process, supports future revenue growth and improved earnings by expanding the company’s high-margin service offerings.

Usio Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Usio's revenue will grow by 12.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.3% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $3.1 million (and earnings per share of $0.1) by about February 2028, up from $2.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.9 million in earnings, and the most bearish expecting $1.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 64.6x on those 2028 earnings, up from 18.9x today. This future PE is greater than the current PE for the US Diversified Financial industry at 17.4x.
• Analysts expect the number of shares outstanding to grow by 2.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.86%, as per the Simply Wall St company report.

Usio Future Earnings Per Share Growth

Risks

• The end of the New York City COVID incentive program removed $12 million in annualized revenue, and while efforts are being made to replace it with stable recurring revenue, there is a risk that this transition may not fully compensate for the loss, which could impact overall revenue growth.
  
• Slower-than-anticipated implementations, particularly with major opportunities like the large leading web-based ERP ISV, may delay revenue realization and affect short-term earnings if timelines continue to slip.
  
• Despite strong growth in the ACH segment, the sector previously suffered from volatility when tied to the cryptocurrency industry, indicating a potential risk if external conditions change or the current less volatile industry dynamics shift, possibly impacting future net margins.
  
• The reliance on the M&A market for growth opportunities bears risk, considering the company has struggled to find suitable acquisitions that meet its criteria, possibly limiting strategic growth and impacting potential future revenues.
  
• While improvements in the Output Solutions business segment offer a potential margin boost, the shift towards more electronic documents could reduce per unit revenues, putting pressure on revenue streams if productivity and efficiency cannot offset this trend.

Valuation

• The analysts have a consensus price target of $5.75 for Usio 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 $7.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $115.9 million, earnings will come to $3.1 million, and it would be trading on a PE ratio of 64.6x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $1.88, the analyst price target of $5.75 is 67.3% 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.