2023-08-02 18:09:01 ET
Summary
- Computer Task Group, Incorporated provides a range of IT and business consulting services to organizations.
- After a revenue decline in 2022, management believes 2023 revenue will be flat.
- Until the firm can reignite revenue growth and improve profitability, I'm Neutral [Hold] on Computer Task Group, Incorporated stock.
A Quick Take On Computer Task Group
Computer Task Group, Incorporated ( CTG ) provides digital transformation consulting services for companies worldwide.
I previously wrote about CTG with a Hold outlook.
Management is previewing a flat growth year in 2023 and seeking to position the company for growth in the future.
My valuation calculation indicates the stock may be fully valued even with a 5% annual growth assumption.
As such, I remain Neutral [Hold] on CTG for the near term until the firm can produce a higher revenue growth trajectory.
Computer Task Group Overview
The company offers a wide range of business, technology, and operations transformation solutions, as well as staffing services, to multiple industries including financial services, healthcare, manufacturing, technology and energy.
The firm is headed by Chief Executive Officer Filip Gyde, who has been with the firm since 1987.
CTG acquires customers through its in-house direct sales and marketing efforts as well as through referrals from a variety of technology and implementation partners across numerous industries.
According to a 2021 market research report by 360 Market Updates, the global market for digital transformation strategy consulting was an estimated $58.2 billion in 2019 and is forecast to reach $143 billion by 2025.
This represents a forecast CAGR of 16.2% from 2020 to 2025.
The main drivers for this expected growth in IT consulting are a large transition from on-premises, legacy systems to cloud-based environments with complex architectures.
There is also expected growth in the number of industries adopting digital transformation strategies, such as manufacturing, finance, and retail, as well as a growing demand for improved customer experience.
IT consulting firms can also leverage their expertise to help companies develop and maintain new or better business models which are better suited to the digital world. Many organizations are turning to IT consulting firms to help them align their digital transformation strategies with their business objectives. This can help companies better leverage technology to improve customer engagement, boost collaboration, and reduce costs.
Also, the COVID-19 pandemic has likely pulled forward significant demand to modernize enterprise systems resulting in increased growth prospects for digital transformation consultancies.
The growth of IT consulting is expected to continue due to the evolving digital landscape, increased demand for improved customer experience, the need to develop and maintain new or better business models, and the accelerated demand for modernization due to the pandemic.
Major competitive or other industry participants include:
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Globant
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Thoughtworks
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EPAM
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Slalom
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Accenture
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Deloitte Digital
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McKinsey
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BCG
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Ideo
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Cognizant Technology Solutions
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Capgemini
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Company in-house development efforts.
CTG’s Recent Financial Trends
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Total revenue by quarter has continued to decline; Operating income by quarter has also dropped in the most recent quarter to a barely positive result.
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Gross profit margin by quarter has trended higher; Selling, G&A expenses as a percentage of total revenue by quarter have also risen in recent quarters.
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Earnings per share (Diluted) have fallen to the lowest level in the past nine quarters.
(All data in the above charts is GAAP.)
In the past 12 months, CTG’s stock price has fallen 10.97% vs. that of the SPDR S&P Software & Services ETF’s ( XSW ) rise of 7.03%, as the chart indicates below.
For the balance sheet , the firm ended the quarter with $23.3 million in cash and equivalents and $1.4 million in total debt, all of which was long-term.
Over the trailing twelve months, free cash flow was only $3.4 million, during which capital expenditures were $1.5 million. The company paid $2.2 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For Computer Task Group
Below is a table of relevant capitalization and valuation figures for the company.
Measure [TTM] | Amount |
Enterprise Value / Sales | 0.4 |
Enterprise Value / EBITDA | 9.9 |
Price / Sales | 0.4 |
Revenue Growth Rate | -18.4% |
Net Income Margin | 1.5% |
EBITDA % | 3.9% |
Net Debt To Annual EBITDA | -1.8 |
Market Capitalization | $125,740,000 |
Enterprise Value | $122,300,000 |
Operating Cash Flow | $4,910,000 |
Earnings Per Share (Fully Diluted) | $0.30 |
(Source - Seeking Alpha.)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings.
Assuming generous DCF parameters, the firm’s shares would be valued at approximately $6.46 versus the current price of $7.79, indicating they are potentially currently overvalued, with the given earnings, growth, and discount rate assumptions of the DCF.
Commentary On Computer Task Group
In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results , management highlighted a "strong" pipeline with IT solutions and services bookings of nearly $100 million.
An area of growth that the company is focused on has been reaping benefits, that of software engineering, as leadership indicated it had generated $30 million in revenue during the quarter, after a $100 million 2022 result, indicating a strong start to the year.
Notably, management continues to invest in its North American sales, solutions and marketing efforts in what it called a "long-term approach to ensure we are positioned for accelerated growth and profitability in the future."
Management didn’t disclose any company, customer or employee retention rate metrics.
Total revenue for Q1 2023 fell 12.5% year-over-year while gross profit margin increased 2.7%.
Selling, G&A expenses as a percentage of revenue rose 5.3% YoY, from the aforementioned sales investments and operating income dropped sharply by 78.1%.
The company's financial position is reasonably solid, with ample liquidity, virtually no debt and positive free cash flow generation.
Looking ahead, the firm is expecting to generate $325 million in revenue in 2023 at the midpoint of the range.
If achieved, this would represent flat revenue growth versus 2022’s contraction of 17% over 2021, indicating perhaps a bottoming of revenue decline.
From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.
I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Recession" once and "Macro" four times.
Analysts questioned company leadership about what to expect from the macro environment, and management said it is seeing slower sales cycles but more detailed discussions with customers.
Regarding valuation, in the past twelve months, the firm's EV/EBITDA valuation multiple has risen by 47%, as the chart from Seeking Alpha shows below.
A potential upside catalyst to the stock could include a macroeconomic "soft landing" and a return to positive revenue growth.
The primary business risk to the company’s outlook is a "higher for longer" interest rate environment, leading businesses to continue to slow-walk their purchase decisions.
Management is previewing a flat growth year in 2023 and seeking to position the company for growth in the future.
While that is a logical approach, my valuation calculation indicates the stock may be fully valued even with a 5% annual growth assumption.
As such, I’m Neutral [Hold] on Computer Task Group, Incorporated for the near term until the firm can produce a higher revenue growth trajectory.
For further details see:
Computer Task Group Sees Flat Revenue Growth In 2023 As Sales Cycles Slow