IT Evolution Energizes Revenue Growth And Margins Despite Economic Uncertainty

Key Takeaways

• ASGN's shift to high-margin consulting and focus on key IT areas could boost net margins and drive revenue growth.
  
• Strong demand and robust federal contracts suggest stable and potentially increasing revenue streams, enhancing overall earnings.
  
• Global uncertainties and reliance on renewals could hinder ASGN's revenue growth, with potential volatility in government revenue streams impacting future financial performance.

Catalysts

Engages in the provision of information technology (IT) services and solutions in the technology, digital, and creative fields for commercial and government sectors in the United States, Canada, and Europe.

• ASGN is evolving its business towards higher-value consulting solutions, with IT consulting approaching 60% of total revenues. This shift is anticipated to increase net margins and potentially overall earnings through higher-margin consulting work.
  
• The company's focus on expanding core areas such as data and analytics, cloud, cybersecurity, and AI applications is expected to drive future revenue growth, as these are critical areas for Fortune 1000 and federal clients' IT road maps.
  
• Strong commercial and federal government bookings indicate pent-up demand for ASGN's IT services, suggesting potential revenue growth when clients normalize their IT spending.
  
• An ongoing investment in advanced solution architecture and select skill sets aims to enhance margins and expand contract sizes, which could positively impact net margins and overall earnings.
  
• The robust federal government contract backlog, particularly in cybersecurity and infrastructure, suggests stable and potentially increasing revenue streams in the federal segment, positively impacting earnings.

ASGN Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASGN's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 5.3% in 3 years time.
• Analysts expect earnings to reach $260.2 million (and earnings per share of $6.4) by about November 2027, up from $183.1 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 18.8x on those 2027 earnings, down from 23.0x today. This future PE is lower than the current PE for the US IT industry at 46.1x.
• Analysts expect the number of shares outstanding to decline by 2.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

ASGN Future Earnings Per Share Growth

Risks

• Global economic uncertainty and lack of meaningful increase in client IT services spending could impact ASGN's revenue growth prospects.
  
• The decline in Federal Government segment revenues year-over-year, due to fewer license revenues, suggests potential volatility in this revenue stream.
  
• High reliance on renewals rather than new work in consulting bookings could impact ASGN’s ability to drive significant revenue growth in the future.
  
• Continued pressures, such as client furloughs and fewer billable days, expected in the fourth quarter could negatively influence ASGN's net income and EBITDA margins.
  
• The upcoming presidential election and related geopolitical and macroeconomic uncertainties could impact ASGN's federal and commercial businesses, affecting revenue stability and growth.

Valuation

• The analysts have a consensus price target of $97.17 for ASGN 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 $115.0, and the most bearish reporting a price target of just $72.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.9 billion, earnings will come to $260.2 million, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $95.4, the analyst's price target of $97.17 is 1.8% 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.