Summary
- TriNet posted its FY22 and Q4 FY22 results.
- Their Q4 FY22 revenue growth was stagnant with a decrease in the net income.
- The management suggested declines in revenue growth in FY23.
- I assign a hold rating on TNET.
Investment Thesis
TriNet Group ( TNET ) recently posted its FY22 and Q4 FY22 results. In this thesis, I will analyze their financial results. I believe they are overvalued compared to the industry, and their revenue growth in FY23 might decline significantly. Even the revenue estimates provided by management are concerning in my opinion. So I assign a hold rating on TNET.
About TNET
TNET provides human resources ((HM)) consulting services, advanced payroll services, and employee benefit options for small and medium-sized businesses across the United States. They offer multi-state payroll processing and tax administration, workers' compensation insurance and claims management, and other HR-related services. It also provides technology platforms, a mobile tool that allows users to view, store, and manage human resource information and also administer human resource transactions such as tax administration and credits, employee performance, compensation reporting, and benefits enrolment and administration. They serve clients in various industries like technology, financial services, and life sciences. TNET was incorporated in 1988.
Financial Analysis
TNET recently posted its FY22 and Q4 FY22 results . It outperformed the market's revenue and earnings expectations by 26.9% and 212%, respectively. The reported revenue for FY22 was $4.9 billion, which is the highest-ever revenue achievement for the company. The revenue for FY22 increased by 7.6% compared to the revenue of FY21. I think the management's use of a vertical integration strategy and an effective client selection procedure was the main factor in the increase. The management was motivated to develop products and services by their focus on the complete lifetime value of a customer, which resulted in a customer staying with the company for an extended period of time. The management seems to believe this vertical approach is sustainable and will deliver profitable growth over time. The net income for FY22 was $355 million, a rise of 5% compared to FY21. I believe the main reason behind this increase was the growth in professional service revenue.
Comparing Q4 of FY22 to Q4 of FY21, total sales were unchanged, and net income fell by 29%. I think the main causes of the revenue growth stagnation and decreased net income were the attrition that the TNET experienced as a result of several significant corporations leaving and the impact of the economic slowdown on the technology industry.
Technical Analysis
TNET is trading at the level of $91. The stock is currently in a downtrend; since October 2021, it has been creating lower highs and lower lows, which is a bearish pattern. The stock is very close to a critical resistance level of $92. If it breaks through this level, the stock may see new highs and rise as high as $110; however, if rejected, it might continue to decline and drop as low as $65.
Should One Invest In TNET?
The company's revenues have steadily risen throughout the previous five fiscal years, reaching their highest level in FY22. However, the estimated revenue for FY23 is roughly $1.26 billion, which is a cause for concern as it is 288% less than the revenue of FY22. I think that the slowdown in the economy and other macroeconomic challenges could impede the company's growth.
They have a P/E ((FWD)) ratio of 17.30x compared to the sector ratio of 17.74x, which shows that they are likely fairly valued. But, we can determine that TNET is currently overvalued using another crucial valuation statistic, the PEG ratio. Due to the fact that it takes projected earnings and revenue growth into account, the PEG ratio is a vital tool for assessing a company's worth. They have a PEG ((TTM)) ratio of 1.52x compared to the sector ratio of 0.52x. A peg ratio above 1x indicates that the company is overvalued. In addition, they have a Price / Sales ((FWD)) ratio of 4.34x compared to the sector ratio of 1.40x. The Price / Sales ratio also shows us that they are overvalued.
The shareholding pattern of TNET looks decent. Institutions own 52% of the stake in the company, which is a positive sign. When institutions hold the bulk of a firm's shares, share price changes are often less volatile, and the company is viewed as safer.
Risk
Their business is subject to various complex federal and state laws and regulations. These laws cover a various range of topics like employer status, employee benefits, baking and money transmission, anti-discrimination, insurance, and banking. PEOs may experience unexpected implementation and enforcement of these regulations at the federal and state levels in connection to their business because many statutes do not directly address PEOs, and regulators frequently lack familiarity with the PEO industry in my view. Changes in laws and implementation of any law might affect their business; it may eliminate the types of services they provide, and they might have to modify their business operations which can hamper the company’s growth.
Bottom Line
Even though they posted solid annual results, I believe there is no fresh buying opportunity in TNET. Their net income declined, and their revenue growth in the fourth quarter of FY22 was sluggish. I predict that this trend will continue in FY23 due to macroeconomic challenges. In terms of valuation, I believe that TNET is now overvalued and that there is no good reason to purchase it at the current price. Hence I assign a hold rating on TNET.
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TriNet Group Doesn't Seem Like An Attractive Buy Right Now