Partnerships With AWS, Microsoft Azure, And Acquisition Of TopBloc Will Expand AI And Cloud Offerings

Key Takeaways

• Strategic focus on high-end IT consulting and partnerships is driving significant revenue growth, margin improvement, and future earnings enhancement.
  
• Acquisitions like TopBloc and robust cash flow support expansion strategies, increasing earnings and shareholder value.
  
• Constrained IT spending, acquisition costs, and uncertain federal spending may affect ASGN's revenue growth, profitability, and revenue stability.

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 transitioning to higher-end IT consulting solutions, with 2024 IT consulting revenues growing to 58% of total revenues. This strategic shift is expected to enhance revenue growth and improve margins as the company aligns itself with high-value service offerings.
  
• The company is seeing expanding pipelines and improved business confidence, leading to double-digit year-over-year growth in commercial consulting bookings, which signals future revenue growth potential.
  
• ASGN's planned acquisition of TopBloc is expected to accelerate growth, particularly with TopBloc's 20%+ anticipated revenue growth and high-teen EBITDA margin in 2025. This should enhance overall company revenue growth and margin expansion.
  
• ASGN's strategic partnerships with leading technology firms like AWS, Microsoft Azure, and ServiceNow are poised to drive growth in innovative solutions such as AI, cybersecurity, and cloud services, likely enhancing future revenue and earnings.
  
• The strong free cash flow position and strategic capital allocation, including M&A and share repurchases, provide a foundation for increased earnings and shareholder value, supporting improved EPS and potentially higher stock valuations.

ASGN Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASGN's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 5.3% in 3 years time.
• Analysts expect earnings to reach $250.6 million (and earnings per share of $4.89) by about March 2028, up from $175.2 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 17.7x on those 2028 earnings, up from 16.9x today. This future PE is lower than the current PE for the US IT industry at 43.2x.
• Analysts expect the number of shares outstanding to decline by 5.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.71%, as per the Simply Wall St company report.

ASGN Future Earnings Per Share Growth

Risks

• Constrained IT budgets and delayed increases in IT spending may limit revenue growth in the short term, impacting future revenue projections.
  
• The acquisition of TopBloc requires a cash outlay and could increase leverage, potentially affecting net margins and earnings if the acquisition does not deliver expected synergies.
  
• Lower-than-expected software license revenues contributed to a revenue shortfall, indicating potential volatility in the federal segment that may impact consistent revenue generation.
  
• Financial services, a significant source of IT spend, experienced a decline, and any prolonged weakness in this sector could negatively impact revenue and profitability.
  
• Uncertainty surrounding federal spending, particularly with the new administration and its initiatives, may lead to inconsistent government contract awards, negatively impacting revenue stability and growth.

Valuation

• The analysts have a consensus price target of $93.333 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 $63.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.7 billion, earnings will come to $250.6 million, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 8.7%.
• Given the current share price of $68.05, the analyst price target of $93.33 is 27.1% 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.