Marcum Acquisition And Tactical Investments Propel National Accounting Leader Toward Robust Growth

Key Takeaways

• The acquisition of Marcum by CBIZ may lead to revenue growth through new markets and clients, and enhance its competitive positioning.
  
• Investing in technology, including AI and data analytics, is expected to positively impact CBIZ's service offerings, efficiency, and profit margins.
  
• Personnel changes and unexpected client losses in the insurance division, along with increased legal expenses and acquisition costs, may significantly impact revenue and earnings.

Catalysts

Provides financial, insurance, and advisory services in the United States and Canada.

• The acquisition of Marcum positions CBIZ to significantly expand its geographical footprint and deepen its expertise in key industries, which may lead to revenue growth through access to new markets and clients.
  
• Expected cost synergies of approximately $25 million from the Marcum transaction, fully realized by 2026, could improve net margins by reducing duplicative costs and improving operational efficiency.
  
• The combined organization's focus on investing in technology, including AI and data analytics, could enhance service offerings and efficiency, likely impacting revenue growth and profit margins positively.
  
• Pro forma net debt of about 3.25x at close with Marcum and a quick deleveraging plan suggests a strong balance sheet management strategy, potentially leading to financial stability and enabling future growth investments which could contribute to earnings growth.
  
• The acquisition makes CBIZ the seventh largest accounting services provider in the nation, which could enhance its competitive positioning and market share, potentially leading to revenue and earnings growth.

Assumptions

• Analysts are assuming CBIZ's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $199.8 million (and earnings per share of $3.98) by about September 2027, up from $117.6 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 25.6x on those 2027 earnings, down from 29.2x today. This future PE is lower than the current PE for the US Professional Services industry at 27.1x.
• Analysts expect the number of shares outstanding to grow by 0.79% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

Risks

• The exit of a small team of producers and support personnel within their property and casualty insurance business led to the loss of a number of clients, which could negatively affect revenue and earnings if similar situations were to recur.
  
• Legal expenses increased due to pursuing legal remedies related to the exit of the team and the loss of clients, impacting net margins.
  
• The company incurred approximately $6.7 million in expenses relating to the Marcum acquisition, which could impact earnings if costs continue to rise or if expected synergies from the acquisition take longer to realize.
  
• Delays in project-based discretionary services and shifts in business investment timelines, especially in areas like payroll, may impact revenue, particularly if economic uncertainty or regulatory changes cause further delays.
  
• The property and casualty event within the insurance division that negatively impacted revenue growth and earnings, indicating a risk to stable revenue streams from unexpected personnel changes or client losses.

Valuation

• The analysts have a consensus price target of $83.0 for CBIZ based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.0 billion, earnings will come to $199.8 million, and it would be trading on a PE ratio of 25.6x, assuming you use a discount rate of 6.4%.
• Given the current share price of $68.72, the analyst's price target of $83.0 is 17.2% 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.