2023-05-28 03:34:53 ET
Summary
- Global ad spending trends appear favorable over the coming years for firms positioned for growth.
- With a low forward earnings multiple based on company guidance, I see shares of STGW as sharply undervalued.
- I outline key price levels to watch on this small cap.
Despite near-term economic worries, the digital advertising market is expected to grow at a steady pace through 2026. According to Inside.com and eMarketer/PubMatic, 2023’s estimated $627 million digital ad spending total could grow by a third to $836 million over the next three years. Firms engaged in this space may benefit.
Indeed, I see robust growth in the fundamentals of Stagwell Inc. ( STGW ), though the technical situation is less favorable.
Solid Global Digital Ad Spend Trends
According to CFRA Research, STGW provides digital transformation, performance media and data, consumer insights and strategy, and creativity and communications services. The company operates through three segments: Integrated Agencies Network, Brand Performance Network, and Communications Network.
The New York-based $1.7 billion market cap Advertising industry company within the Communication Services sector trades at a high 114 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.
Stagwell expects 7.5% to 10% organic revenue growth this year with $450 to $490 million in adjusted EBITDA for FY2023. Adjusted EPS guidance is in the $0.90 to $1.05 range. While the company announced a secondary equity offering back in March, on May 9, 2023, the firm agreed to repurchase approximately 23.3 million shares from AlpInvest Partners at a price of $6.43 per share. The $150 million transaction removes AlpInvest as a shareholder. Looking ahead, revenue growth is seen at 21% on the 2-year stack, so it indeed earns its A+ Growth rating from Seeking Alpha.
On May 9, Stagwell reported an EPS miss on revenue of $622 million which was a 3.3% year-on-year decline. Shares dipped after the report but have since recovered those losses.
On valuation , analysts at CFRA see earnings continuing to climb this year after profitability turned positive in 2022. Per-share earnings are then seen as rising above $1 by FY2024. Its upcoming Q2 report should feature strong year-on-year earnings growth while sales are expected to rise more than 10% sequentially. Compared to its peers, STGW has impressive margins while overall cash flow as a percentage of sales is near the industry average.
STGW: Earnings Outlook & Key Profitability Ratios
Given the strong growth outlook, I like to look at the PEG ratio on a forward basis. At just 0.13, it’s sharply below the sector median. If we assume $0.90 of year-ahead EPS and a sector multiple of 16.7, then the stock would trade near $15, but a slowdown in corporate ad spending is a key risk. Also, any additional equity offerings would be dilutive to shareholders. I would discount the earnings multiple to about 10 given those realities. As a result, a high-single-digit stock price is fair.
STGW: Attractive Across Valuation Metrics
Seeking Alpha
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Thursday, August 3 BMO. Before that, the firm holds its annual shareholders’ meeting on Wednesday, June 14.
Corporate Event Risk Calendar
The Technical Take
While STGW has a volatile history, shares have been consolidating for the better part of the last 18 months. Notice in the chart below that shares have support near $5 while resistance is less obvious. The stock spiked above $9 back in March but was cut nearly in half earlier this month when the 2022 low of $4.80 was successfully defended.
With a flat 200-day moving average, SGTW is trendless and simply messy from a technical perspective. I would like to see shares hold above the 2022 peak of $8.28 on a weekly closing basis as well as time to work in the investor’s friend – the longer STGW holds above the 200-day, the more an upside trend case can be made. Overall, the technical situation is neutral right now.
STGW: Shares Hovering Around $6, Lack Of Trend
The Bottom Line
I am a buy on valuation but recognize STGW's lackluster chart. Long here with a top under the 2022 low looks favorable.
For further details see:
Stagwell: Growing Global Ad Spending A Boon To This Undervalued Small Cap