TopBloc Acquisition And IT Consulting Will Drive Future Value

Key Takeaways

• ASGN's strategic acquisition and consulting focus in AI, cloud, and cybersecurity are driving revenue growth and expanding net margins through high-demand services.
  
• Strong federal government segment contracts and adaptable service delivery models support stable future revenue growth and margin expansion.
  
• Economic and regulatory pressures, alongside cautious client spending, challenge ASGN’s revenue growth and earnings stability in commercial and federal segments.

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's strategic acquisition of TopBloc, a Workday Business Impact Partner, is already exceeding bookings, revenue, and adjusted EBITDA expectations, likely boosting future revenue and earnings growth.
  
• ASGN's focused growth in the consulting business, particularly through AI, cloud, and cybersecurity services, reflects strong demand in strategic technology areas, which would enhance revenue and potentially expand net margins due to higher service demand.
  
• Resilience and adaptability in ASGN’s business model through flexible onshore and nearshore teams should help maintain and even expand net margins by providing solutions that cater to clients’ IT modernization and cost containment needs.
  
• ASGN’s federal government segment benefits from strong bookings and a solid contract backlog worth $3.1 billion, covering 2.6 times the segment's trailing 12-month revenues. This predictability is likely to support stable future revenue and earnings growth.
  
• Steady engagement with clients on digital engineering projects and leveraging AI are anticipated to sustain revenue growth, while the ability to provide cost-saving IT solutions further supports margin expansion.

ASGN Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASGN's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 4.2% in 3 years time.
• Analysts expect earnings to reach $183.2 million (and earnings per share of $4.5) by about April 2028, up from $158.0 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 16.8x on those 2028 earnings, up from 14.2x today. This future PE is lower than the current PE for the US IT industry at 31.0x.
• Analysts expect the number of shares outstanding to decline by 4.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.51%, as per the Simply Wall St company report.

ASGN Future Earnings Per Share Growth

Risks

• The commercial segment's revenue decreased by 8.1% year-over-year, reflecting continued softness in portions of the segment that are sensitive to macroeconomic cycles, impacting overall revenues and net margins.
  
• The Federal Government segment saw a 6.7% decrease in revenues year-over-year, influenced by some program terminations and the impact of federal cost-cutting initiatives (DOGE), which could affect future earnings.
  
• Despite growth in IT consulting revenues, client confidence decreased over the quarter, with clients remaining cautious about increasing their IT spending, which could limit revenue growth and net margins.
  
• While optimism exists in AI and cybersecurity investments, there remains uncertainty in broader client IT spending plans, which could impact future revenue and earnings stability.
  
• The financial services industry's cautious spending due to macroeconomic factors, such as higher inflation and tariffs, poses a risk to ASGN's future revenue opportunities in a significant client sector.

Valuation

• The analysts have a consensus price target of $61.833 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 $75.0, and the most bearish reporting a price target of just $53.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.3 billion, earnings will come to $183.2 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $50.86, the analyst price target of $61.83 is 17.7% 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.