2023-04-08 01:03:36 ET
Summary
- In this article, I'll showcase one of my latest investments - French company Teleperformance SE.
- It's my intention to slowly build to a position in the company, with a thesis of seeing a return of over 100% in the next 3-4 years.
- This is a market leader with sector-leading profitability and fundamentals - and here you'll learn what's relevant to know about the company and its valuation.
Author's Note: This article was published on iREIT on Alpha in late March/early April of 2022.
Dear Subscribers,
So, I honestly doubt you've heard of Teleperformance SE ( TLPFY ) ( TLPFF ). Despite it being a market leader, the company is generally undercovered, and the ADR is thinly traded. If you elect to go for the company as an investment, my recommendation would be to look at and consider the natively traded either Paris or XETRA ticker, which offer significantly higher liquidity.
Teleperformance is a market leader - and in this article, I'll show you the specifics of this market leader and why it is an excellent overall investment, if only for the longer term.
Teleperformance - The company and its upside
I will show you why I recently started a long position in Teleperformance. But first, the company's fundamentals.
The company provides what the market calls "outsourced customer experience management services" - this is a fancier way of saying that the company essentially is a call center operator. It offers care solutions, technical support, acquisition services, digital solutions, analytics, and specialized services aside from its core segments, such as Visa management, debt collection services, interpreting and translation services, and back-office services.
The company employs over 400,000 people across the world.
It's by far the #1 leader in outsourcing for customer and citizen experience. Over 50% of the company's workforce works from home. The company employs people from 91 countries, works in over 300 languages for nearly 1,200 clients ranging from megacorps to smaller businesses, and they operate in over 170 markets.
What's more, this company's track record is nothing short of stellar. For decades, it's been a company that , like clockwork , improves its results. Check out the company's cash flows and dividends.
The same trends can be seen across other fundamentals - be it revenues, net income, equity, assets, ROIC/WACC ratios, RoE/RoA, ROCE or profitability increases.
This company is among the 70th-85th percentile in every margin that matters, and compared to where it's been historically, we've been able to see some superb improvements over the past 10 years. The company is BBB rated, at stable rating from S&P Global, and this has only been added to by what amounted to be an excellent 2022, despite challenges from COVID-19 normalization (COVID was a massive valuation spike for this company, more on that later).
For the full year of 2022, the company grew to record revenues - again - with 14.6% YoY growth, despite the attrition of COVID-19-based contracts. The margins are, again, at record levels coming in at 21.5% in EBITDA and 15.5% in EBITA. This also comes with a 15.8% growth in net profit and a 16.7% growth in the company's dividend.
That dividend is barely above 1.7%, but it's a grower - not a shower. In terms of payout ratio, the company is in the 65th percentile in its industry and pays less than 35% of its comparable earnings. At current 1.7%+, it's also at a better yield than during almost any time in its history.
Some major happenings during the 2022 fiscal.
The reason that Teleperformance came onto my radar was very simple. It was a stock that I never thought I would be able to buy due to its prohibitive valuation. But then came some negative noise regarding conditions for work and content moderation in some of the company's offices and geographies, and the stock fell 38% in a single day , due to a massive sell-off by funds.
That was when I got up my eyes for the business - and it hasn't been recovering much since. This is despite essentially unchanged growth potential.
I didn't buy at the time - and Teleperformance recovered its momentum quickly - only to be caught in the recent set of downturns.
This time I was ready. Take a look at the recent 14-15 years of valuation and where this puts the company.
More on where I'd put the company later.
The company has given us 2023 outlooks. The full decline from COVID-19 contracts isn't yet unwound from the company's earnings. There's another €200M at least here that's expected to be declining here, with an LFL revenue growth of 7% , and continued increases in earnings.
The company is also open to expanding further through targeted M&A. Overall, Teleperformance is confirming that it's ahead in meeting its financial targets , with a constant revenue above €10B.
The company operates at high client satisfaction ratings, which have improved significantly as well over the past 4 years, and now stand at 85% 9-10 scoring, and the company has one of the best remote/home agent programs in the world - at least according to surveys and reviewers.
The company's clients are, as you might expect, across multiple industries. Some major sectors include Airlines, Hospitality, OTA, Cruise, and Car rental industries. The Travel and Hospitality industry alone is experiencing massive growth - 41% YoY from 2021 to 2022 - and Teleperformance, or TP, has been adjusting its business model and its operations to meet these needs through increased digital tools, automation, and other ventures.
While it's accurate to describe TP primarily as a "core" services business, such as call centers, based on an 85.7% revenue portion from this segment for 2022, the company also generates over €1.2B in revenues from specialized services - and considering the company manages a GM of 32.7%, this makes it one of the more efficient businesses in the entire sector.
It also has a very appealing geographic business mix, with little overexposure to any one geography.
The company is a long-term play. This becomes clear when we look at the company's RoR, which in the short term looks to underperform many of its communication sector peers, but over the long-10 years term comes to over 20% annually , which would outperform the market by a factor of over 2x.
The company scores high in typical valuation models. A quick Piotroski gives the company a 6 out of 9, the only negative being the movement of the current ratio and dilutive nature of its shares, as well as some asset turnover. Everything else is positive. I also want to highlight the fact that despite volatility, the company has managed a double-digit ROIC while scoring less than 5.5% WACC, all sources included. That means that things could get a lot worse before Teleperformance could be considered to be value-destructive. This ratio/KPI means a lot to me, and I've started delving a lot deeper into these numbers this year and going forward.
The company has taken on some debt - quite a bit of it actually, to pay for its M&A's. However, given where the company's earnings, cash flows, and dividend payout ratios are, this is not all that of a concern to me.
Because Teleperformance, as I see it, is significantly undervalued to its actual earnings potential.
Let me show you what I mean.
Teleperformance Valuation - A lot to like
I understand that most investors here are not big fans of going far outside the field - and investing in French stocks with low yields such as this one might seem like an "out there" prospect or potential to you.
However, I would like to remind you that anyone who follows the average movement of the market, and buys as the market does, is likely to see average rates of return.
I'm looking to beat the market.
In order to do that, I believe an investor needs to go against the grain. That means taking advantage of undervalued opportunities and, oftentimes, acting the opposite way that we see others acting. When everyone was frothing to buy tech and crypto, I stayed away like it was the plague. When everyone was selling banks and finance, I bought them. Usually, I'm a contrarian - I buy what others don't want, though I focus on the quality of things that I do buy.
Teleperformance is such a company. The company, typically traded at a premium of 22-25x, is now trading at 17-18x P/E normalized depending on comparatives and forecasts. Everyone looking at the company in terms of analysts agrees on a few things, including the key forecast that the company is in the process of growing earnings.
Even in the case of only a very conservative valuation for the company going forward, of 15-18x, you can still expect a 17-19% annualized RoR, and that's without any sort of reversal to premium. However, both because of the company's EPS growth and dividend growth, I believe we're looking at a situation where a premium is justified because Teleperformance is forecasted to grow at a rate of 16-19% in the next few years on average.
On a 23-27x P/E forecast, this turns into a 130%+ RoR, or close to 36% per year. The company has almost no debt despite recent M&As. Its debt is at 35% long-term to capital, or a 1.5x net debt/EBITDA, with a gross cost of debt of 1.88% with 77% fixed, most of it in EUR bonds.
The company also has a proven track record of value creation over time and is one of the most well-diversified communications companies I have ever encountered.
The step from call centers to specialized recruitment/HR services is a big one, but it's also a massive market to go into. With the M&A of PSG, the company is slated to see exposure to $300B of annual US recruitment spend alone, and this is expected to grow annually, as only 20% of current corporations use outsourced solutions for this.
Teleperformance plays in a market where you see competition from peers like Telus (TU), Concentrix (CNXC), Atento (ATTO), Sykes, Majorel, TTEC (TTEC), and Webhelp - but all of these are smaller in relevance when looking at key areas compared to Teleperformance. You can also include Accenture ( ACN ) and Capgemini ( CGEMY ) in the list, both of which are companies I actively cover, but these also come at different valuations and appeals.
Teleperformance is more appealing.
I believe Teleperformance has the very real potential to increase my invested capital at a rate that's higher than the average market. That is the simple reason that I am investing here, and why I expect to invest more going forward.
It's how I've grown my capital faster than the market. It's why, despite missing out on COVID-19 Tech booms, why I've been able to grow my capital at market-outperforming rates for years. Here's the current 3-year RoR of my portfolios, as a whole, as of Friday the 31st of March.
This is a mix of Scandinavian, German, French, Italian, Spanish, US, Canadian, and South American stocks as well as some Japanese ones. All of the companies I invest in are, as I believe them to be at the time of my investment, undervalued with significant return potential. Whenever a company reaches its potential or goes beyond it, I start looking at trimming and reinvesting that capital at a lower valuation.
This means that I am always , for most of my portfolio, at a relatively "low" valuation overall for my investments, and most of what I own tends to be either undervalued or on its way up.
Yield, at this point, is something I want, but it has taken a secondary role compared to valuation and upside. I am no longer as income-focused as I once was, and this is expressed with this company because Teleperformance doesn't have much in the way of income appeal. Even the 1.7% I get is, for me, enough at this point.
My ambition is that every company I invest in has the conservative potential for a triple-digit rate of return on a 3-4 year basis.
This puts a very high demand on me as an analyst in terms of safety, fundamental research, and making sure that what I "BUY" is of the "right" quality - like buying the best cut of meat you can.
I do this by focusing on Teleperformance fulfilling my qualitative demands which basically are me demanding the company be among the best in its field, at a low valuation with a good conservative upside, and little/no fundamental red flags.
Teleperformance fulfills this. Its profitability is top-notch- It has significant fundamentals and massive growth potential. Because the company is relatively predictable, a DCF valuation is worth doing here. And at a growth-stage EPS growth of 15% and a terminal growth rate of 4-5%, we get a conservative EPS DCF valuation of €270-€280, which implies a 20.6% margin of safety.
S&P Global gives Teleperformance a range of €146-€390, one of the widest spreads I've ever encountered, with an average of €327. 16 out of 17 analysts are either at a "BUY" or "Outperform", which means that the lone "SELL" rating is someone I'd really like to have a chat with and take a look at their modeling assumptions.
From every avenue I look at Teleperformance, this company seems more likely than not, to me, to outperform.
I recently bought my first stake in Teleperformance, and I'm about to want more.
Here is my thesis for the company at this stage.
Thesis
- Teleperformance is a superb company in the call center and general business service outsourcing field. I consider the company to be one of the finest around, and due to a combination of fundamental strength and excellent upside, to be a "BUY" here.
- The "BUY" is stated based on a conservative target share price of €275/share - and by giving it that target, I'm 10-20% lower than the average analyst, due to my always discounting conservatively. However, I believe this company has the very real potential to outperform.
- For that reason, I recently bought shares, and I'm about to buy more.
Remember, I'm all about:
- Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn't go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.
For further details see:
Teleperformance SE: The Market Leader You've Never Heard Of