2023-03-16 10:50:44 ET
Summary
- CBZ is a serial acquirer that has bought over 60 businesses so far.
- Rising rates create a risk in capital allocation strategy, not in the business model.
- Shares are overvalued on a multiples and an intrinsic basis.
CBIZ, Inc. ( CBZ ) is a leading provider of financial, insurance, and advisory services. They operate over 120 offices throughout 33 states and employ over 6,500 people. Here is how their revenue breaks down:
CBZ Investor Presentation
CBIZ has been publicly traded since 1995, their long-term share performance is below:
Dividend Channel
There were also spots where getting in at the right time could have delivered market-crushing returns. When bought at the right price, the stock has been an impressive compounder.
Dividend Channel
There aren't publicly traded peers doing exactly what CBZ does. The market for their services is fragmented and mostly privately owned. Below are the return on capital metrics for the company
Revenue 10-Year CAGR | Median 10-Year ROE | Median 10-year ROIC | EPS 10-Year CAGR | FCF/Share 10-Year CAGR |
8.7% | 10.5% | 7.9% | 12.3% | n/a |
Capital Allocation
CBZ fits the definition of a serial acquirer. They've purchased over 60 companies in their history. They issued equity more often in the earlier years with less debt, but in 2009 began using more debt and stopped diluting. As they've used debt for acquisitions, they have also paid down considerable debt as you can see below, where we look at how capital was allocated in USD millions:
Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
FCF | -8 | 39 | 40 | 67 | 60 | 91 | 84 | 135 | 122 | 117 |
Acquisitions | 41 | 12 | 42 | 28 | 29 | 12 | 71 | 57 | 79 | |
Debt Repayment | 473 | 378 | 400 | 433 | 547 | 733 | 679 | 590 | 805 | 714 |
Repurchases | 26 | 28 | 36 | 9 | 20 | 17 | 27 | 59 | 100 | 129 |
SBC | 6 | 6 | 6 | 6 | 6 | 7 | 7 | 9 | 11 | 14 |
Repurchases have been increasing lately and this is a promising sign. I think far too much capital is put into dividends over repurchases, especially at established, long-standing companies such as CBZ. So it's refreshing to see a track record of not paying out dividends and now putting a higher priority on reducing share count. This doesn't mean there isn't other risk associated with capital allocation, I'll address this risk now.
Risk
Rising interest rates mean a higher cost of capital, specifically on debt since CBZ no longer issues new shares. The biggest risk I see is either the rate of acquisitions going down quite a bit or each acquisition becoming more burdensome as interest rates on debt needed to make these purchases go up. This doesn't mean I would rather see them issuing shares to pay for future acquisitions, more on that in the valuation section below.
Being a services business, CBZ doesn't consume too much capital. The business model itself doesn't have any issues, operating margins are close to 12%. In order to grow, however, the company has used debt to acquire smaller businesses. A strategy like this simply won't work in the future like it did before.
Valuation
We'll start by looking at the current and historical multiples, but without similar peers, it makes the DCF model more important.
EV/Sales | EV/EBITDA | EV/FCF | P/B |
1.9 | 13.1 | 22.5 | 3.3 |
Macro Trends
Macro Trends
On their own, the multiples don't tell the full story. The historical trend is clearly moving upwards, and this gives an indication of how the company is being priced. Based on both, I don't see any discount from a multiples perspective.
Next is the DCF model:
Money Chimp
Assuming a much lower growth rate due to the consequences of higher rates on their M&A, I see the shares as being overvalued on that basis.
Conclusion
This company has been an effective compounder for its tenure as a publicly traded stock. This tenure has also coincided with an ever-declining rate environment, which clearly was a benefit when acquisitions could be made with continually lower interest debt. Those days are now over, and not likely to return again soon. The business model itself is not sensitive to rates, it's the capital allocation strategy that is going to be affected going forward.
At the end of the day, the returns on invested capital are still not high enough over the cost of capital. Higher interest rates will mean they will need a higher hurdle rate for new acquisitions. This is why I don't love the fundamentals of the business. Coupled with a share price that is overvalued to me, this stock is a pass for me.
For further details see:
CBIZ: Rising Rates Hurt This Compounder's M&A Strategy