Tactical Moves And Market Expansion Boost Prospects Amid Margin Concerns

Key Takeaways

• Simplified corporate structure and strategic acquisition likely to enhance investor attraction and positively impact CompoSecure's stock valuation.
  
• Expansion with Fiserv and record net sales signal sustainable revenue growth and confidence in future financial performance.
  
• Strategic moves and leadership changes might disrupt operations temporarily, impacting revenue and EBITDA amidst domestic and international growth challenges.

Catalysts

Manufactures and designs metal, composite, and proprietary financial transaction cards in the United States and internationally.

• The strategic acquisition by the David Cote family and the conversion of all outstanding Class B shares to Class A shares simplifies CompoSecure's corporate structure, potentially making it more attractive to investors and removing market overhang. This could lead to an improved stock valuation as market uncertainties diminish, impacting its stock price positively.
  
• Anticipated annual incremental free cash flow of more than $20 million from the aforementioned acquisition provides CompoSecure with additional resources to invest in growth initiatives or return capital to shareholders, potentially improving net margins and earnings.
  
• The expansion of the partnership with Fiserv to include marketing and reselling of Arculus Authenticate taps into Fiserv's extensive customer base, offering significant revenue growth opportunities from a broadened market reach and enhanced product offerings.
  
• Record net sales achieved in the quarter, driven by strong domestic and international demand, indicate a sustainable growth trajectory. This, alongside tightened fiscal full year 2024 guidance towards the higher end of the previous range, suggests confidence in continued revenue growth.
  
• The amended and extended credit facility with favorable terms demonstrates financial stability and support from lenders, reflecting confidence in CompoSecure's business model. This financial restructuring may lower interest expenses and improve cash flow, further bolstering the company's financial health and potentially its attractiveness to investors.

Assumptions

• Analysts are assuming CompoSecure's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.9% today to 3.5% in 3 years time.
• Analysts expect earnings to reach $18.1 million (and earnings per share of $1.23) by about November 2027, down from $28.2 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 15.6x on those 2027 earnings, down from 44.7x today. This future PE is greater than the current PE for the US Tech industry at 14.9x.
• Analysts expect the number of shares outstanding to decline by 43.77% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Risks

• The strategic transaction and leadership changes could introduce short-term operational disruptions, potentially impacting revenue and EBITDA as the company adjusts.
  
• Dependence on domestic business growth in a slowing macroeconomic environment may pressure revenues if consumer spending declines.
  
• International expansion presents regulatory and market adaptation risks that could affect revenue growth and margins if not managed effectively.
  
• Product mix shift due to new card constructions and inflationary pressures could further compress gross margins and affect net income negatively.
  
• Investments in partnerships and new capabilities like Arculus require significant upfront costs and uncertain returns, potentially impacting free cash flow and earnings if these ventures do not meet financial projections.

Valuation

• The analysts have a consensus price target of $16.07 for CompoSecure 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 $18.0, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $513.7 million, earnings will come to $18.1 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 7.9%.
• Given the current share price of $15.27, the analyst's price target of $16.07 is 5.0% 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.