Automated Enforcement And Fleet Management Propel Market Share And Revenue Growth

Key Takeaways

• Expansion in automated traffic enforcement and legislation indicates potential for significant market and revenue growth in government solutions.
  
• Strategic focus on SaaS and mobile solutions in parking, alongside capital allocation strategies, demonstrates a commitment to improving margins and shareholder returns.
  
• Verra Mobility's growth strategies and financial health are challenged by political, legal, market competition, and economic factors across its diverse business segments.

Catalysts

Provides smart mobility technology solutions and services in the United States, Australia, Canada, and Europe.

• The strong bid pipeline in automated enforcement and recent contract awards suggest an increase in revenue from new and expanded government contracts, impacting future revenue growth and expanding the market share in automated traffic enforcement.
  
• The expansion of automated enforcement legislation in various states represents potential market growth opportunities that could significantly increase the company's addressable market and drive future revenue growth in government solutions.
  
• The robust demand in domestic travel and strong performance in fleet management is expected to contribute to revenue growth in the commercial services segment.
  
• The strategic shift in T2 Systems towards software and mobile solutions, despite a temporary decline in product revenue, indicates a focus on higher-margin SaaS revenue, which can lead to improved margins in the parking solutions business.
  
• The company's focus on capital allocation, including stock buybacks and active evaluation of M&A opportunities, suggests confidence in future growth prospects and a commitment to shareholder return, potentially impacting earnings per share positively.

Assumptions

• Analysts are assuming Verra Mobility's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.3% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $228.2 million (and earnings per share of $1.31) by about August 2027, up from $96.7 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 24.2x on those 2027 earnings, down from 47.0x today. This future PE is lower than the current PE for the US Professional Services industry at 28.1x.
• Analysts expect the number of shares outstanding to decline by 2.95% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

Risks

• A reliance on government contracts and legislative changes for growth in automated enforcement could face unforeseen political or legal challenges impacting revenue.
  
• The shift from hardware to software and mobile solutions in the T2 Systems segment indicates a transition phase that might impact short-term revenues and net margins if not managed efficiently.
  
• The competitive landscape, particularly in Government Solutions, may affect win rates and contract values, potentially impacting revenue growth and market share.
  
• Dependence on travel demand for the Commercial Services segment could face risks from economic downturns or changes in consumer behavior, impacting revenues and net margins.
  
• Exposure to international markets and fluctuating demand for toll and mobility solutions could lead to revenue volatility, affecting overall earnings.

Valuation

• The analysts have a consensus price target of $30.42 for Verra Mobility 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 $34.5, and the most bearish reporting a price target of just $26.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $228.2 million, and it would be trading on a PE ratio of 24.2x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $27.61, the analyst's price target of $30.42 is 9.2% 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.