Alight Is An Elite Company Trading At A Discount To The Market

Jun. 16, 2022 3:32 PM ETAlight, Inc. (ALIT)12 Comments4 Likes
Gavin Barwell profile picture
Gavin Barwell
200 Followers

Summary

  • Alight has a business model that gives it a great deal of stability and also allows it to grow revenue.
  • The company is a dominant player in all its key markets.
  • Alight is trading at a discount to the market, providing an investment opportunity.

New York Stock Exchange, Wall st, New York, USA

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Alight, Inc. (NYSE:ALIT) is a dominant player in all its market segments. The company has been taking market share from its key competitors and has established itself as a valuable service provider to its clients. The company is trading at a discount to the market, offering investors a valuable opportunity to invest in a valuable company.

Stability is a Feature of Alight's Business

Alight provides mission-critical integrated digital human capital and benefit administration solutions to over 30 million people. The company, which went public through a successful merger with Foley, delivers its services through its Alight Worklife employee engagement platform, which enables its business process as a service (BPaaS) model. The company receives revenues for each employee it processes, based on the solutions involved.

The nature of these services is that they provide Alight with an immediate competitive advantage: the switching costs of moving to another service provider are so great that clients are to a great degree captured, and will stay on board so long as a certain threshold of competence is achieved. As such, according to the company's 2021 10-K, the company enjoyed 97% retention in 2021, rising from 96% in 2020. Similarly, clients are willing to sign on for multi-year periods of 3 to 5 years. This provides a stability to Alight's business model that is clear from its financial results. In the last three years, revenue has risen from nearly $2.4 billion in 2018 to over $2.9 billion in 2021. Importantly, the company typically registers annual recurring revenue (ARR) of 83+%. Net income has risen from -$21 million in 2018 to $72 million in 2021. Given the company's stable business model, free cash flow (FCF) has been steady at around $140 million. The company has a return on invested capital (ROIC) of 8.2%, which is not elite and reflects the continued investments the company has been making.

Revenue growth is also a consequence of the company embracing more of a land-and-expand revenue model, compared to the previous model which focused more on retention. Management is highly focused on growth, and as its 2022 Investor Presentation makes clear, the total contract value (TCV) has risen 205% year-over-year, as the company has landed many Fortune 100 clients such as Royal Dutch Shell (SHEL).

Analysis of the Business Segments

Alight's revenues derive from three segments: Employer Solutions, Professional Services and Hosted Business. Employer Solutions accounts for 87% of revenues, compared to 12% for Professional Services and 1% for Hosted Business.

ALIT revenues

2021 10-K

Employer Solutions

Employer Solutions has three major drivers: health, payroll and wealth.

Health

Alight is the dominant market leader in health, serving 70% of Fortune 100 and over half of Fortune 500 companies. The company's biggest challenger is Conduent (CNDT) and has slowly lost market share to Alight. Furthermore, the business segment that competes with Alight is not part of Conduent's core business, with the consequence that management is not focused on making it a market leader. Willis Towers Watson PLC (WTW) has a presence in the industry but is not a serious competitor.

Alight's management has over recent years combined the search for organic growth with strategic acquisitions that have allowed it to build an integrated service offering. One of those key acquisitions is its 2019 acquisition of Hodges-Mace, which has strengthened Alight's position in the mid-tier market. Alight has 6% market share there and is working on growing market share. Alight's competitors, such as benefitexpress, Benefitfocus, Inc. (BNFT), Businessolver, Bswift LLC, (owned by AET, prior private equity owned), public company BNFT are smaller and do not enjoy the economies of scale and wider, integrated service offering that Alight has.

Navigation services are a fast-growing segment of health and once again, the company's strategic acquisitions have shaped its ability to deliver a broader, more integrated service offering. Its 2018 acquisition of Compass Professional Services has allowed it to become an important player in the segment. Most of Alight's clients self-insure, and navigation reduces their healthcare costs and provides them with additional benefits such as assisting employees with accessing specific healthcare services. The company's key competitor here is Accolade (ACCD), however, Accolade has a much riskier/focused revenue model, with 3 Fortune 500 companies accounting for nearly 40% of its revenues. In addition, Alight offers a much broader range of services.

Payroll

Alight, through its division, Alight Global Payroll is the second-largest solutions provider in global payroll. Payroll is becoming increasingly outsourced across all company sizes. As the chart below from Statista shows, even as early as 2019, pre-global pandemic, a significant share of companies were outsourcing their payroll functions.

Share of organizations who outsource payroll

Statista

The biggest player in the market is Automatic Data Processing, Inc. (ADP) through its division ADP Enterprise HR. However, Alight has been taking market share from ADP. The market is competitive with players such as Fair Figure providing valuable insights. Through Alight's ability to provide software and services to clients, the company has been able to win contracts from or against ADP in securing Royal Dutch Shell, and PricewaterhouseCoopers, among others.

Wealth

Alight is the largest independent provider of wealth services such as administration and record-keeping for benefit plans. The company competes against rivals such as Empower Retirement, Fidelity Investments, and Voya Financial (VOYA). Because Alight is independent, it can offer services that are free from the conflicts that potentially characterise its competitors. In addition, the company can offer an integrated package to clients, including its other services. Here, Alight has won a $2.3 billion deal in which it secured the federal government as a client, providing services to the Thrift Savings Plan. The deal will earn the company between $100 million and $130 million in 2023 alone.

Professional Solutions

Alight is once again an elite competitor, operating systems for its clients on a project or recurring basis.

Valuation

The company has a forward price-earnings (PE) ratio of 13.74. This is in comparison to the S&P 500 which has a PE ratio of 18.86. Given that the company only listed this year, we do not have any insight into the historical valuation of the company. However, it's clear that the company is undervalued compared to the market.

Conclusion

Alight is a well-run company that is selling at a discount compared to the market. The company's fundamentals are sound, and as evidenced by our analysis, the company is a dominant player in its key markets. Investors have an opportunity to buy this quality company at a low valuation.

This article was written by

Gavin Barwell profile picture
200 Followers
I'm a UK-based entrepreneur and manage a portfolio of mostly UK stocks. I maintain a broad overview of US markets and analyse stocks for my edification only. None of my investment advice should be acted upon.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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