Refinancing And Digital Innovation Propel Growth In Fintech's Future

Key Takeaways

• Refinancing efforts and investments in digital solutions are poised to enhance financial stability and drive higher-margin revenue, improving net income and EPS.
  
• Diversification through expansion into new markets and a focus on eco-friendly products aims to grow revenue and net margins by meeting evolving market demands.
  
• Heavy investment in growth and digital solutions amid financial restructuring poses risks if new ventures and market trends do not meet revenue expectations.

Catalysts

Engages in the design, production, data personalization, packaging, and fulfillment of financial payment cards.

• The refinancing of debt with $285 million of new senior secured notes and a new $75 million asset-based revolving credit facility extends debt maturities to 2029, providing financial stability and potentially improving net income and EPS by reducing market risk and interest expense.
  
• Increased investment in digital solutions and Software-as-a-Service, including the instant issuance solution, is expected to drive higher-margin revenue growth, positively impacting net margins and EPS.
  
• Expansion into adjacent markets such as health care payment cards and mobile wallet digital push provisioning services is aimed at diversifying revenue sources, which could lead to revenue growth and enhanced net margins by tapping into new high-growth sectors.
  
• Ongoing share repurchase program, with almost $9 million out of a $20 million authorization already completed, supports EPS growth by reducing shares outstanding and signaling confidence to investors about the stock's undervaluation.
  
• Enhanced focus on prepaid and eco-friendly card products responds to market demand for fraud prevention and sustainable solutions, potentially increasing sales growth in the high-value packaging solution segment, positively affecting overall revenue and margins.

Assumptions

• Analysts are assuming CPI Card Group's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $55.5 million (and earnings per share of $4.47) by about September 2027, up from $18.0 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 8.5x on those 2027 earnings, down from 16.8x today. This future PE is lower than the current PE for the US Tech industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 3.1% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.79%, as per the Simply Wall St company report.

Risks

• The increased SG&A expenses, including investments for long-term growth and higher performance-based compensation compared to lower levels in 2023, could pressure net margins if the revenue growth does not offset these increases sufficiently.
  
• The reliance on continued sales growth in the prepaid and debit/credit services businesses amid market fluctuations and potential inventory normalization challenges could impact revenue stability.
  
• Substantial investments in digital solutions and new market expansions, such as health care payment cards and digital push provisioning services for mobile wallets, carry execution risk which could affect earnings if these initiatives do not yield expected returns or take longer to materialize.
  
• The refinancing of debt with senior secured notes and entering into a new asset-based revolving credit facility increases financial obligations. If the new investments do not generate anticipated returns, servicing this debt could impact net income.
  
• Dependence on trends in card issuance and consumer adoption of contactless payments as growth drivers could pose a risk if there's a significant shift in payment technologies or consumer behavior that reduces the demand for CPI's card products, potentially affecting revenue and earnings growth.

Valuation

• The analysts have a consensus price target of $35.67 for CPI Card Group 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 $40.0, and the most bearish reporting a price target of just $33.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $551.0 million, earnings will come to $55.5 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $27.33, the analyst's price target of $35.67 is 23.4% 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.