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TeleTech Will Fall

|About: TTEC Holdings, Inc. (TTEC), Includes: SYKE
Summary

TTEC valuation is too high compared to sector

Growth is slower than appears at first glance

15-20% downside from current prices to fair value

Concerns about TTEC:

  1. Valuation is much higher than both historical multiples and comparable companies. SYKE is the closest company in the BPO (call center) space from a revenue and operating margin standpoint. TeleTech currently ($41.20) trades at a P/S multiple of 1.34 and a P/E of 22.9 based on FY17 guidance. Sykes ($26.30) trades at a P/S multiple of 0.7 and a P/E of 14.6 based on FY17 guidance. This is despite the fact that the TTEC balance sheet is in worse shape comparitively from a cash and stockholder equity standpoint.
  2. Acquisition price to revenue multiples, which are usually generous because of the premium inherent in purchasing a company, also do not support the current share price. Atelka went for 45/60=0.75, and Connextions went for 80/115=0.70. Even tacking on restructuring charges of 20%, the multiples are 0.9 and 0.83 respectively. Applying the average of those back to TTEC gives an expected share price of $26.50...
  3. They are not growing much organically. The guidance raise that happened after Q1 was purely from the addition of 9 months of revenue from an April acquisition. Organic growth seems stuck in the 3-4% range, and bookings have been flat which points to more of the same going forward.
  4. Analyst price targets and recommendations are pegged at $32.00 and hold. Even after a Q1 beat and "raised" guidance, a Q2 beat with reaffirmed guidance, there were no changes made to PTs.
  5. Effective income tax rate is artificially depressed by income tax holidays and temporary tax relief in the Philippines which expire by 2020. This will provide net income margin pressure going forward.

Theory:

  • I posit that the large runup in share price was driven by a short squeeze brought about by the revenue and earnings beat for Q1, combined with the inaccurate appearance of a guidance raise caused by the incorporation of acquisition revenue. It also didn't help that the press has taken to reporting GAAP revenue (vice lower and more relevant non-GAAP) alongside non-GAAP EPS.
  • The market capitalization increased by $450 million based on earnings that beat estimates by $3 million. That alone should be enough evidence to prove that the current share price is ridiculous and unsustainable.
  • I expect TeleTech to revert to a more reasonable valuation soon as it becomes clear that further upside is non-existent and profit taking causes the shares to fall.

Fair value (premium valuation):

Based on P/E of 19: 19x1.8= $34.20
Based on P/S of 1.1: 1.1x1410÷46= $33.70
Based on analyst PT: $32.00
Average: $33.30

Comparable value (SYKE valuation):

Based on P/E of 15: 15x1.8= $27.00
Based on P/S of 0.7: 0.7x1410÷46= $21.45
Average: $24.23

Conclusion:

  • I would recommend selling and/or shorting the stock at current levels ($41.20 as of 8/10/17).

Disclosure: I am/we are short TTEC.