2023-09-28 11:47:51 ET
Summary
- Not surprisingly, CPI Card Group lowered its sales guidance for the full year when it reported its Q2 results.
- The stock has fallen nearly -60% since I placed a "Sell" rating on the stock.
- With the "Sell" thesis largely played out, I'm now taking a neutral stance on the stock.
Back in March , I placed a "Sell" rating on CPI Card Group ( PMTS ), saying that the surge in its 2022 results driven by contactless cards seemed eerily similar to the strong results it reported in 2015 driven by EMV cards, after which the stock collapsed. In May , I reiterated my "Sell" rating, saying it made a mistake not lowering its guidance. With the stock down nearly -60% since my initial write-up and down over -30% since my May follow-up, let's take a closer look at the name.
Company Profile
As a refresher, PMTS manufactures credit, debit, and prepaid debit cards for banks, credit unions, retailers, and other institutions. The company offers EMV cards, which are smart chip cards that users push into card reads, as well as non-EMV cards that have magnetic stripes that are swiped into machines. PMTS also makes both EMV and non-EMV cards with contactless technology that utilize near field communications (NFC) technology. It also offers a SaaS solution that allows firms to instantly issue cards to their customers.
Q2 Results and Lowered Sales Guidance
For Q2, PMTS saw its revenue edge up 1% to $115.0 million, which topped analyst estimates calling for sales of $103.5 million.
Gross margins slipped -30 basis points to 35.5%. Adjusted EBITDA rose 18.4% to $23.3 million from $19.7 million a year ago.
By segment, Debit & Credit revenue fell -1.0% to $92.2 million. Gross margins for the segment came in at 35.5%, down -70 basis points. EBITDA for the segment was $27.5 million, an increase of 0.7%
Prepaid Debit revenue jumped 13.6% to $21.8 million. Segment gross margins were 35.7%, up 210 basis points. EBITDA for the segment rose 41.3% to $8.3 million.
The company said pre-paid margins benefited from gained efficiencies from a labor conversion and a more favorable mix and operating leverage.
Overall, PMTS generated -$0.1 million in free cash flow in the quarter and $3.7 million for the first half of the year. It ended the quarter with $284.4 million in debt and cash of $11.2 million, good for leverage of 2.8x.
Looking ahead, PMTS reduced its sales guidance for the full year. It now expects revenue to be flat to up low single digits. It had previously forecast sales to grow in the mid-single digits.
Meanwhile, it reaffirmed its adjusted EBITDA guidance, saying it still expects to grow adjusted EBITDA in the mid-single-digit to high-single-digit range. It also still looking for FCF to double and for net leverage to be between 2.5-3.0x.
PMTS projects sales to decline in Q3 and then return to growth in Q4. The company noted that some large banks have been focused on inventory, while tightening credit standards have also impacted ordering.
Asked about its confidence in Q4 sales returning to growth on its Q2 earnings conference call , CEO Scott Scheirman said:
"I would say, based on recent conversations with customers about their project plans, we believe conditions will start to improve later in the year. But obviously, the timing of the market improving could change depending upon a variety of factors, economic conditions, our customers' business objectives, and so forth. I think what's really important to note here is the long-term secular trends continue to be intact. Contactless cards will continue to transition in US; eco-focused cards are popular -- will be very popular. We're the market leader there for sure. And then on average, annually, 90% of our revenue is reoccurring. So we have a model that has secular trends, reoccurring revenue in nature. But clearly, we're going through some cautious spending with our customers. And again, these are based on recent conversations. And we have, in the last few months, seen some customers push large projects into '24."
On the call, management was asked about the similarities it is seeing with contactless cards and EMV cards back in 2015 and 2016. Management said that while it still expects over 80% of cards manufactured to be contactless in a few years, that the transition has been slower than expected. However, it said the situation today with contactless cards versus EMV cards back in 2015 and 2016 wasn't comparable.
PMTS' quarter was fairly lackluster and it lowered its guidance. While the stock dropped about -4% the next session after the report, it's been a steady downward march since. Contactless has stalled around the same penetration as EMV cards did, so it was interesting that the company got a question about that on its earnings call, even though it said it did not see any similarities.
In my last write-up I said that management should have lowered its guidance after its Q1 report, which it did have to do when it reported its Q2 results. With the company predicting a pick-up in growth in Q4, there is still the possibility it may have to lower guidance again, as the macro seems to be getting more difficult, not easier.
Valuation
PMTS trades at 4.9x its EBITDA 2023 consensus of $101.9 million. Based on the 2024 consensus of $111.8 million, the stock trades at a 4.5x multiple.
On a PE basis, it trades at around 6.6x the 2023 consensus of $2.71.
The stock trades at a lower multiple to its closest peer CompoSecure ( CMPO ), but PMTS is projected to grow a bit slower and has a bit more leverage.
For its part, CMPO guided for 6-12% revenue growth in 2023 and for adjusted EBITDA growth of 7-14%.
PMTS Valuation VS CMPO (FinBox)
Conclusion
While PMTS could have further downside if it has to lower its Q4 outlook when it reports its Q3 results, I think at this point my "Sell" thesis has played out. The stock's valuation is inexpensive if it can hold onto its gross margins and revenue, while its leverage is manageable. The company still will have to navigate a tough market so it's not out of the woods yet, but the easy downside drop has already occurred.
As such, I'm going to lift my "Sell" rating on the stock and move to a more neutral stance. Risks to the downside are continued lackluster ordering from banks and projects getting further pushed out. Upside could occur if the company can show that the market is turning and that it can grow in 2024. Given its valuation, the company doesn't need to show huge growth for the stock to rally in my view.
For further details see:
CPI Card Group: Removing 'Sell' Rating After Nearly -60% Decline