Xerox is spinning off Conduent Inc. - a business process services company. Spinoffs can trade cheap because existing shareholders often dump the stock without regard to value because they don't want to hold the spin off. So here's a quick look at Conduent. There were some references to this being another Accenture and worth looking into. So let's start with the business description:
"Conduent Incorporated is a business process services company. The Company provides business process services with expertise in transaction-intensive processing, analytics and automation. The Company is engaged in providing business and government services. The Company offers customers in various areas, which include health solutions, learning services, digital payments, legal and compliance solutions, human resources, finance and accounting, procurement solutions and digital transformation. The Company also serves customers in various areas, such as aerospace and defense, automotive services, banking, chemical, insurance, pharma and life sciences, retail and consumer products, transportation, travel and utilities, among others."
Not sure about Xerox, but Conduent's financials are awful. This is no Accenture folks.
Here are some gems from their investor presentation:
- Low margin business overall (less than 10% EBITDA margins)
- Adj. EBITDA has declined for three straight years ($872MM in 2013 to $639MM to 2015) and qtr over qtr too
- All their business segments had declining revenue!
- Debt/TTM Adj. EBITDA is 3X.
- Debt is high yield and the interest cost is almost 8%!
- $150MM annual interest expense will make things interesting if business keeps falling
- Healthcare segment almost certainly faces headwinds from the Trump presidency.
- TTM Pre-tax income was negative.
So now, how low is this puppy going to trade, that we can squeeze blood from a stone? Net debt stands at $1.785b. TTM EBITDA is at $630MM. By my calculations, there are 205MM shares of this garbage outstanding, so the market cap at $14.9 a pop is $3.05b. Since this puppy made no net income last year, EV/EBITDA stands at around 7.7X EBITDA. Not sure I like the business or the valuation here.
But it could become interesting if it gets cheap enough. I think though that the low quality and high debt profile of the business won't make for high conviction trades.
"Conduent Incorporated is a business process services company. The Company provides business process services with expertise in transaction-intensive processing, analytics and automation. The Company is engaged in providing business and government services. The Company offers customers in various areas, which include health solutions, learning services, digital payments, legal and compliance solutions, human resources, finance and accounting, procurement solutions and digital transformation. The Company also serves customers in various areas, such as aerospace and defense, automotive services, banking, chemical, insurance, pharma and life sciences, retail and consumer products, transportation, travel and utilities, among others."
Not sure about Xerox, but Conduent's financials are awful. This is no Accenture folks.
Here are some gems from their investor presentation:
- Low margin business overall (less than 10% EBITDA margins)
- Adj. EBITDA has declined for three straight years ($872MM in 2013 to $639MM to 2015) and qtr over qtr too
- All their business segments had declining revenue!
- Debt/TTM Adj. EBITDA is 3X.
- Debt is high yield and the interest cost is almost 8%!
- $150MM annual interest expense will make things interesting if business keeps falling
- Healthcare segment almost certainly faces headwinds from the Trump presidency.
- TTM Pre-tax income was negative.
So now, how low is this puppy going to trade, that we can squeeze blood from a stone? Net debt stands at $1.785b. TTM EBITDA is at $630MM. By my calculations, there are 205MM shares of this garbage outstanding, so the market cap at $14.9 a pop is $3.05b. Since this puppy made no net income last year, EV/EBITDA stands at around 7.7X EBITDA. Not sure I like the business or the valuation here.
But it could become interesting if it gets cheap enough. I think though that the low quality and high debt profile of the business won't make for high conviction trades.
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