2023-11-29 00:39:29 ET
Summary
- Verra Mobility recently posted decent quarterly results with a 6.2% increase in revenue.
- The company has potential for growth once domestic travel picks up, but investing at current high levels may not be rewarding.
- Technical analysis suggests a possible correction in the stock, so caution is advised before buying.
Verra Mobility Corporation ( VRRM ) offers smart mobility solutions worldwide. VRRM recently posted decent quarterly results. The revenue growth wasn’t significant, but I think they have a solid potential for growth. Although I think VRRM is trading at a high valuation, and only high growth will be able to justify its high valuation, which might happen once domestic travel boosts up. But for now, I think investing at such a high level might not be rewarding. Hence, I assign a hold rating on VRRM.
Financial Analysis
VRRM recently announced its Q3 FY23 results . The revenue for Q3 FY23 was $209.9 million, an increase of 6.2% compared to Q3 FY22. Its commercial services and government solutions segments performed well, leading to a revenue rise. The revenue from the commercial services grew by 14% in Q3 FY23 compared to Q3 FY22. The major reason for the solid performance was higher tolling activity and increased travel volume. The government solutions segment’s revenue increased by 1% in Q3 FY23 compared to Q3 FY22. The addition and expansion of more of the speed programs led to a rise in its recurring revenues, which was the major reason behind growth in this segment. The adjusted EBITDA margin of 46% in Q3 FY23 was unchanged from the prior year quarter.
The net income rose by 23.3% in Q3 FY23 compared to Q3 FY22. The revenue and income growth were impressive. But I still think it is not the true potential of VRRM. I believe it has way more potential to boost its revenue growth. The reason I am saying this is because domestic travel has yet to recover fully. The international travel trend in the U.S. has picked up, whereas domestic travel in the U.S. has softened. However, domestic travel in 2023 is higher than the previous year. The growth isn’t significant, so once domestic travel sees strong growth, the company will benefit from increased rental car tolling. So, there is still a lot of potential for growth for the company, and the management has updated its FY23 revenue guidance. They are expecting it to be around $810 million, which will be their record annual revenue.
Technical Analysis
VRRM is trading at $20. In May, the stock broke the $17.5 level, which the stock was trying to break since 2020. After the breakout, the price surged more than 20%. But after the up move, the stock retraced and touched the breakout level of $17.5, and after the retest, the stock price started to move up. However, the most recent weekly candle is red, and the pattern made here is a double-top pattern, which is a bearish pattern that indicates that the uptrend might be over. It might be too soon to say that the stock might reverse from the current level, but it would be wise to stay cautious right now. So, I believe one should avoid buying it at the current level because of the downside possibilities. We should only think of buying it once it breaks the $21.5 level.
Should One Invest In VRRM?
Its stock price has a strong momentum, and the results have been impressive. Despite this, I don't think there is any undervalued opportunity here. VRRM is trading at a P/E [FWD] ratio of 36x compared to the sector median of 20.75x. So, the company looks already priced in, although the scope for growth is high for them, and once domestic travel picks up, we can see solid growth in the company's revenue growth. But for now, I think investing at such high levels might not be quite rewarding. So, instead, I would advise adding the stock on pullbacks. Additionally, its stock price has a solid momentum, but the recent candles indicate that there is a chance that the stock might be corrected in the near term. Hence, for now, I am assigning a hold rating on VRRM despite solid results.
Risk
Customer concentration happens to their company occasionally. For instance, the RAC industry's Avis Budget Group, Inc., and Enterprise Holdings, Inc., are among the important clients that its Commercial Services division depends on. Seasonality, energy price rises, general international, national, and local economic conditions, and cycles, as well as other factors impacting travel levels, all impact the health of the RAC sector. In their Government Solutions category, they likewise encounter a concentration of customers. About 19.5% of their total revenue came from the New York City Department of Transportation [NYCDOT] in the fiscal year 2022. Their contract with NYCDOT, like many other contracts, is subject to certain risks and uncertainties, such as termination rights, payment delays, audits, and investigations, all of which could have a materially negative impact on their business.
Bottom Line
VRRM posted decent results, and it has the potential to grow its revenues. Despite all the positives, I think its valuation is high, which I think can be justified once domestic travel picks up. But for now, I think investing at such high levels might not be rewarding. In addition, the technical chart suggests we might see a correction in the stock in the near term. Hence, I assign a hold rating on VRRM.
For further details see:
Verra Mobility: Good Growth Potential