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I laid out the case for Concentrix (NASDAQ:CNXC) in my article on 12/2020. At that time the company had just been spun off from SYNNEX (SNX). My analysis showed what appeared to be a rapidly growing company selling at a very inexpensive valuation. Since that article CNXC stock is up about 67%. The stock peaked at $185 on 12/29/21 but has now dropped to $166.50 after a 10% correction. I have made a small addition to my position on 1/10/22 and would strongly consider adding more shares if the price pulls back another 5% or more. The stock has 30% upside potential over the next year in my view.
As described in my prior article Concentrix describes itself as a top global customer experience (CX) solutions provider. The company claims to have over 750 clients with over 95 Fortune 500 companies among that list. In a regulatory filing, the company describes its business as: “Our differentiated portfolio of solutions support Global Fortune 2000 as well as high-growth companies across the globe in their efforts to deliver an optimized, consistent brand experience across all channels of communication, such as voice, chat, email, social media, asynchronous messaging, and custom applications. We strive to deliver exceptional services globally supported by our deep industry knowledge, technology and security practices, talented people, and digital and analytics expertise.” The company has customer contact sites (call centers) that cover 70 languages, across 6 continents, from over 280 locations in the Americas, Asia-Pacific and EMEA. Concentrix states that its clients include:
•7 of the top 10 global digital companies
•8 of the top 10 global internet companies
•6 of the top 10 U.S. health insurance companies
•4 of the top 5 U.S. banks
•7 of the top 10 global automotive companies.
The company indicates that the average client tenure is 15 years indicative of a high degree of business continuity.
Financial Results and Projections Since the Spin off
Concentrix has reported three quarters of earnings to date since the spin off. In each of the three quarters, the company beat earnings estimates. The next report is due out on 1/18/22. Analyst expectations are for earnings of $9.84 for the year ending 11/30/21. This represents earnings growth of about 62% from the prior year (when CNXC was still part of SYNNEX. Analyst projections for 2022 are for earnings of $11.04 representing 12.2% growth from 2021. It is not clear if these analyst projections include the recent acquisition of PK discussed below. The industry where CNXC operates is not widely covered by the analyst community. There are currently only three analysts covering Concentrix (BofA Securities, Cross Research and Barrington Research). All three analysts give a BUY rating to CNXC with an average price target of $214/share representing a 30% increase compared to the current stock price.
The current stock price around $165 represents a 16.9 P/E multiple relative to projected 2021 earnings and only a 15.1 multiple relative to 2022 projected earnings. These are very modest multiples relative to the observed and projected earnings growth.
In its latest earnings report, CNXC announced a quarterly dividend of $0.25 per share in the fourth quarter and also that the Board has authorized a five hundred million dollars stock repurchase program.
Recent Acquisition of PK
On 11/22/21 the company announced the $1.6B acquisition of PK, a leading global customer experience (CX) design engineering company from Carlyle. This is a significant deal considering that the market cap of CNXC is about $8.6B. Concentrix sees this deal as giving it the ability to scale digital capabilities faster while building excellence in key high growth areas of CX Design & Development, AI, Intelligent Automation and Customer Loyalty.
Other projected financial implications are outlined as:
- Expect PK to contribute approximately $530 million of revenue and $85 million of adjusted EBITDA in the first full year following the acquisition, reflecting 20% year-over-year growth for PK
- Transaction expected to be financed primarily through additional bank debt borrowings under amended credit facility
- Net leverage expected to be 2.5x at close on a trailing twelve-month pro forma basis. Concentrix expects to reduce net leverage within the first twelve months after the transaction closes
- Expect non-GAAP diluted earnings per common share accretion of at least $0.50 in the first full year, with further accretion expected in the second full year
Risks
The PK acquisition is significant and needs to be accretive to the existing business and financials. Relatively large deals involving increased leverage always involve some degree of risk.
Currently, there is a higher degree of market risk as the Federal Reserve acts to increase interest rates in the view of higher current inflation. Higher interest rates are likely to involve some degree of valuation compression of equities. The ongoing Covid-19 pandemic affects all businesses and could be a negative if it were to get substantially worse. Other risks as described in the 10K filing include disruptions in markets where its call centers operate and changes in labor costs. There is some degree of current client concentration with the top 5 clients representing 26% of revenues.
Since the spin-off CNXC stock has been volatile with relatively large price swings. Anyone purchasing the stock must be tolerant of this stock price volatility. The volatility however gives opportunities to profit for the more nimble investor.
Conclusion
Concentrix has demonstrated excellent financial performance since it spun off from SYNNEX roughly a year ago. The valuation of the stock is excellent given the current and projected earnings growth. I continue to hold significant positions in CNXC in my personal accounts and in accounts managed for Freedom Mountain Investment clients. I have made small additional purchases on 1/9/22 and would add more if the stock price declines further.
