2023-07-20 17:27:39 ET
Summary
- ASGN's shares have dropped over 8% in the past 12 months due to a bearish intermediate trend, despite strong bookings in the commercial consulting wing of the business.
- The company's profitability has decreased, with a reported non-GAAP EPS of $1.38 missing estimates by $0.05 per share, and net income falling by 26% compared to the same period last year.
- ASGN's valuation doesn't look cheap, with a forward GAAP earnings multiple of 19.31 as costs continue to mount on the income statement.
Intro
We wrote about ASGN Incorporated ( ASGN ) roughly 12 months ago when we pointed to the momentum in the higher-margin commercial consulting wing of the business. Bookings were strong in this segment, and we felt that ASGN would have the capability to keep on adding value due to the sustained growth of IT spending. Furthermore, the company had strung together a series of earnings beats where forward-looking earnings revisions continued to impress at the time.
However, because of the bearish intermediate trend at the time, we designated ASGN a hold in case the pattern of lower highs and lower lows did indeed continue to the downside. Followers of our work will be well aware of the importance we place on a stock's technical analysis. The premise here is that it is impossible for us to know everything about ASGN from a fundamental basis. Therefore, operating on the belief that the stock's fundamentals are only bullish when indeed the share price is rising , we use the technical charts to time our entries to make sure we give ourselves the best chance of being on the right side of the trade. In fact, lower lows did indeed play themselves out over the past 12 months in ASGN which has resulted in shares dropping just over 8% over the past 12 months alone.
A negative 8% 12-month nominal return in ASGN is disappointing considering the S&P500 returned over 18% in the same time frame. Furthermore, since the stock's intermediate bearish trend has been in motion for almost 20 months now, this gives that trendline (resistance) some potency, which means a near-term breakout may be difficult to accomplish. Therefore, let's dig into how ASGN's valuation and profitability trends currently stack up as we approach the company's second-quarter earnings numbers to ascertain whether investors may begin to start biting here on the long side at these lower levels.
Profitability
ASGN's reported non-GAAP EPS of $1.38 per share missed estimates by $0.05 per share in Q1 this year. This was the first bottom-line miss management has reported since the second quarter of 2019. Furthermore, top-line sales on an organic basis (excluding acquisitions) fell by just over 1% to come in at $1.128 billion for the quarter. Net income of $49.5 million fell both sequentially and by $17.3 million or by 26% compared to the same period 12 months prior.
So why the reduced profitability? For starters, the company's gross margin dropped by 100 basis points in the quarter due to more revenues being derived from lower-margin segments ( federal government ) and not enough sales coming from the commercial segment. The high-margin 'Commercial Consulting' segment continues to grow significantly (30%+ year-over-year growth) but the market seems to remain oblivious to the potential here. Are we missing something?
Well, when we venture further down the income statement, we see that SG&A costs rose above $224 million in Q1 this year and interest expense increased to $15.4 million. Suffice it to say, given that only half of the company's debt is fixed and that more investment will undoubtedly be needed to boost growth rates, bottom-line earnings growth looks like it will remain under pressure for some time to come.
Valuation
From a valuation perspective, ASGN trades with a forward GAAP earnings multiple of 19.31 which in fact is very close to the company's 5-year average for this metric (20.08). Not only is the forward-earnings multiple not that cheap, but the revisions trend (with respect to how consensus believes earnings will play themselves out going forward) leaves a lot to be desired. As we see below, the earnings estimate for this present fiscal year has been dialed down by over 20% over the past six months alone. Although revisions have stabilized somewhat in recent sessions, what investors need to realize is that ASGN's present stock price is based on the company hitting that $5.17 per share bottom-line target next year. Therefore, any continuation of the current bearish trend regarding EPS revisions (where external pressures persist on the macro front) would most likely affect the share price before long.
Growth Needs To Return Quickly
Followers of our work will be aware that many times we give 'growth metrics' the back seat when it comes to projecting where shares of a respective company are headed. We do this with companies that are trading for pennies on the dollar and have robust balance sheets to boot. However, when one goes through ASGN's balance sheet , it becomes evidently clear that the company has very few hard assets to protect the company if indeed adverse trading conditions were to continue. This means ASGN's balance sheet is more susceptible to potential impairment charges in the event forward-looking earnings revisions continue to weaken.
Conclusion
To sum up, management widened its guidance range for the company's upcoming Q2 earnings numbers, which we think is to protect itself somewhat against a surprising Q2 number. Although shares have rallied well since early May, it will be interesting to see if shares can garner the required momentum to punch above the heavy resistance discussed earlier. We look forward to continued coverage.
For further details see:
ASGN: Assessing If Momentum Can Continue Post Q2 Earnings