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Opinions Jordan Zinberg
Converge Technology SolutionsCTS.TOPAST TOP PICKJan 15, 2024
Jordan ZinbergStock price when the opinion was issued
As of Apr 23, 2025. Market Open.
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A pandemic darling, but their valuation became extreme and they had trouble managing their profitability. As they remained profitable, it couldn't keep up with the street's rising expectations, and so it sold off hard. It bottomed last fall. He bought it as it started to rebound, hoping for rising profitability.
Bruce Campbell (2)Technology in Canada has been number 1 over the last month and number 2 over the last week. Converge hasn't participated in the long term tech trend. It has had a decent bounce recently but he is not sure if its downward trend is over. He doesn't know its fundamentals but feels there are better places to be in tech.
The stock's momentum has certainly been negative, however, it pays a yield of 1.2%, has shown good revenue growth, and generates free cash flow. It has a healthy balance sheet, but its profit margins are thin. Valuation is quite cheap, with a forward sales multiple of 0.3X, a forward P/E of 7.1X, and a price to book of 1.1X. It expects small revenue growth over the next few years, a slight decline in earnings this year with strong growth thereafter. We typically do not like buying on negative momentum and would prefer to see the stock find its footing, but we would be comfortable with holding here, and for an investor with a long timeframe and has a high risk tolerance, we would be OK with adding here in the event that it rebounds from these levels
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Stockchase InsightsEverything that could go wrong with this went wrong. A company was interested in buying them, but didn't, and CTS missed a couple of quarters. Then, it was removed from the TSX. Now we're at maximum pessimism and the company is not doing any buying. Margins should rise. It will take time to recover, but he would buy at current levels.
Jordan ZinbergKeep in mind that the buyback is not mandatory. CTS can choose not to do anything. Free cash flow was $65M in the last 12 months, so it has some capacity. But with net debt at $320M we would like to see lower debt instead. There has been some net insider buying in the last six months, but a new committment would go a long way in helping investor confidence. We are OK holding, for now.
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Things soured a bit because the strategic review didn't see enough bids. However it is at a good valuation now at 8 X 2024 earnings and the growth rate looks much higher going forward. Its first quarter was pretty good, it has a substantial stock buy-back program and its balance sheet is OK. It is shifting from M&A to organic growth. It sets up well for the next 3 to 5 years and he would buy it in a non-registered account.
Rollup strategy. Now in Germany and UK. Moving more into managed services. Tough time with acquisitions, margins haven't improved, working capital hasn't materialized. Still believes in the strategy. Lots of upside if they can produce a couple of good quarters.
Jamie Murray Insiders own 8% and there has been a small amount of net buying in the past six months.
There has been no news on the contracts. It is not likely they were cancelled yet, but that remains a possibility.
ENGH might be interested, or a US-cloud company.
However, we think the interest has come from private equity players, perhaps Thomas Bravo.
We would be OK owning some today.
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Stock was $3.70-ish prior to the rumour/confirmation of the strategic review.
The tech world has changed to the positive since then, fairly dramatically.
But the recent miss needs to be taken into account as well.
Plus, we need to believe management that the three big deals are on their way.
Currently 13X earnings, we think a proper multiple without all this 'noise' would be in the 17 to 18X range.
So assuming growth, and using forward consensus estimates, that gets us to $8.28, so on a present value discounted basis about $7.50 with no control premium applied.
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In 2020/21 it was growing rapidly but has pulled back from its high of $12. There were some missteps and it missed a couple of quarters. However in the past 6 to 12 months it has started focusing on integrating the companies they bought and not buying new ones. It is also focusing on cost control and cross selling. It is doing the right things now but it will take some time to expand their margins.