Investments In JANA Partners And Capital Returns Will Unlock Value

Key Takeaways

• Strategic divestitures and management changes aim to enhance operational efficiency, improve revenue, and increase net margins and cash flow.
  
• Active capital return strategies, such as share repurchases and dividends, focus on increasing shareholder value and earnings per share.
  
• Diverse challenges across different segments, from revenue declines to competitive reliance and debt dependency, pose risks to Cannae Holdings' future financial stability and growth.

Catalysts

A principal investment firm.

• Cannae Holdings is focused on improving the performance and valuation of its portfolio companies, enhancing operations, cash flows, and strategic positioning to drive long-term growth and increase the net asset value (NAV). This is expected to positively impact revenue and net margins.
  
• The divestiture of Alight's non-core assets has provided capital that enabled debt reduction, share repurchases, and the initiation of dividends, which should enhance earnings and free cash flow, contributing to higher net margins.
  
• Investments in high-growth potential private companies like JANA Partners and Watkins Company are anticipated to generate higher returns and provide interim cash flows, positively impacting Cannae's overall earnings and NAV.
  
• Active capital return strategies, including share repurchases and a newly instituted dividend, aim to drive earnings per share (EPS) growth and shareholder value by reducing the outstanding share count and returning excess cash.
  
• Strategic changes in management and operational practices at key holding companies, like Dun & Bradstreet and Alight, are expected to enhance operational efficiencies and performance, driving revenue growth, improved net margins, and free cash flow generation.

Cannae Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cannae Holdings's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts are not forecasting that Cannae Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Cannae Holdings's profit margin will increase from -67.3% to the average US Diversified Financial industry of 14.1% in 3 years.
• If Cannae Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $63.6 million (and earnings per share of $1.03) by about April 2028, up from $-304.6 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 29.1x on those 2028 earnings, up from -3.5x today. This future PE is greater than the current PE for the US Diversified Financial industry at 14.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Cannae Holdings Future Earnings Per Share Growth

Risks

• The management's optimism with forward-looking statements involves uncertainties and risks, which may result in actual results differing materially from expectations, potentially impacting future earnings.
  
• Dun & Bradstreet's low revenue growth and decline in adjusted EBITDA highlight challenges in maintaining financial performance, which could negatively affect their contribution to overall revenue.
  
• Alight's slight decline in fourth-quarter revenue and dependency on debt paydown strategies indicate potential challenges in achieving significant organic growth, potentially impacting net margins.
  
• The financial performance of AFC Bournemouth, despite current optimism, heavily relies on maintaining the high competitive performance in the Premier League, contingent success that might affect long-term investment returns.
  
• The restaurant division's revenue decrease and the ongoing casual dining sector headwinds suggest vulnerabilities in achieving consistent operating income, impacting overall earnings stability.

Valuation

• The analysts have a consensus price target of $24.333 for Cannae Holdings 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 $29.0, and the most bearish reporting a price target of just $22.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $449.5 million, earnings will come to $63.6 million, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 7.1%.
• Given the current share price of $17.16, the analyst price target of $24.33 is 29.5% 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.