CNXC - Concentrix: Shares Revisit IPO Price Strong Value Case Ahead Of Earnings

2023-06-25 00:00:05 ET

Summary

• More companies are discussing AI on earnings conference calls, with firms investing in the technology potentially seeing profits in 2023.
• Concentrix Corporation is a buy due to its attractive valuation and earnings growth trajectory, despite concerning technicals ahead of Q2 results.
• Automation and AI trends are expected to boost CNXC's margins, with the company's acquisition of Webhelp for $4.8 billion in March highlighting its confidence in AI.
• I spot key price levels to watch into and post earnings this week.

More companies are referencing “AI” on earnings conference calls, according to FactSet. The disruptive technology is poised to streamline work for most industries, and firms positioned well and those bold enough to put capex to work in artificial intelligence could strike profits as 2023 wears on.

I have a buy rating on Concentrix Corporation ( CNXC ). The valuation is very attractive given the earnings growth trajectory, but its chart is concerning ahead of Q2 results Wednesday evening.

AI En Vogue

According to Bank of America Global Research, CNXC is a leading global provider of Customer Experience ((CX)) solutions. The company provides services in 70 languages, in 40+ countries from 275+ locations in the Americas, Asia-Pacific, and EMEA. It has 250,000+ employees. Focus areas are 1) Customer Lifecycle Management, 2) CX/UX Strategy & Design, 3) Digital Transformation, and 4) Voice of the Customer ((VOC)) and Analytics. Channels of communication used are voice, chat, email, social media, asynchronous messaging, & custom applications Investment Rational.

The California-based $4.3 billion market cap Data Processing & Outsourced Services industry company within the Industrials sector trades at a low 10.4 trailing 12-month GAAP price-to-earnings ratio and pays a small 1.3% dividend yield. Ahead of earnings this week, the stock carries a 4.3% short interest.

Automation and AI trends are seen as boosting CNXC’s margins and its management team views ChatGPT and other large-language models as tools for its clients, according to recent management meetings with BofA. That confidence was underscored by Concentrix’s acquisition of Webhelp for $4.8 billion this past March. In its upcoming Q2 report, be on the lookout for further commentary on how AI is seen by its CEO Chris Caldwell and CFO Andre Valentine. Trading at just 7 times 2024 consensus earnings, a steep discount to its peers, there’s certainly a value case on Concentrix.

Back in March, the company reported an earnings miss while it topped revenue estimates. Net sales grew by 6.5% YoY and it reported solid free cash flow results. Following the Webhelp buy, earnings could accelerate over the coming quarters. An expanded services offering at a global level along with impressive growth in emerging markets are tailwinds for its voice and non-voice segments. The Q2 EPS consensus estimate is $2.52 which would be a 14% decline from the same period a year ago. The options market implies a 7.4% earnings-related stock price swing. CNXC has missed in the last 3 reports and shares have traded lower post-reporting in each of the previous 5 instances, so those are bearish factors to weigh this week.

On valuation , analysts at BofA see earnings being roughly flat compared with 2022’s EPS total. Per-share profits are then expected to rise at about a 10% clip in the out year through 2025. The Bloomberg consensus outlook is about on par with what BofA projects. Dividends, meanwhile, are expected to hold steady at the $1.10 annual rate, so the yield should remain modest on this growth stock. Following a more than 50% drawdown off its early 2022 all-time high, the valuation case today is compelling. Concentrix features near-single-digit earnings ratios and the company trades at less than 10 times free cash flow while its EV/EBITDA ratio is less than half that of the S&P 500.

Concentrix: Earnings, Valuation, Free Cash Flow Forecasts

Assuming 10% EPS growth off trough earnings today, the below valuation metrics are quite attractive. If we assume $12.25 of next-12-month EPS and apply a 16 P/E (bringing the forward PEG ratio just to the sector median of 1.6), then the stock should be near $195. Even if we apply discounts to the earnings multiple to account for higher interest rates today and use a margin of safety, CNXC stock remains a strong buy on valuation.

CNXC: Very Favorable Valuation Metrics, Trough Earnings Currently

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q2 2023 earnings date of Wednesday, June 28, AMC with a conference call immediately after the results cross the wires. You can listen live here .

Corporate Event Risk Calendar

The Technical Take

Ahead of earnings Wednesday night, CNXC has just recently marked a key technical milestone that the bears can celebrate. The stock retraced back to its IPO price when the firm was spun off. That’s a natural area of interest on the chart as many shareholders remember that opening price, so being long here with a proper stop can make sense.

Troubling, though, is that the RSI momentum reading at the top of the graph suggests that bearish trends are in place. RSI has not been able to get back above 50. Also, the long-term 200-day moving average is definitely downward sloping. Moreover, I see resistance in the $105 to $109 range. While I very much like the valuation and fundamental growth outlook, very bearish momentum and poor price action are seen on the technical chart.

CNXC: Revisiting the IPO Price, Bearish Momentum

The Bottom Line

I have a buy rating on CNXC. While I acknowledge that the technicals are quite weak, the valuation is too compelling to discount. If momentum improved, I would have a strong buy rating on this, but just a soft buy is warranted here.

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