Concentrix: Worth A Look (NASDAQ:CNXC) (2024)

Introduction

The stock of Concentrix Corporation (NASDAQ:CNXC), a facilitator of CX solutions (Customer Experience) and technology for enterprises across the world (over 2000 clients), hasn’t been a very rewarding proposition for its stakeholders since it got spun off from Synnex (which consequently ended up merging with Tech Data to become TD Synnex). Since trading as an independent public entity, the CNXC stock has eroded investor wealth to the tune of 40%, even as the Nasdaq has expanded by 53% during the same period. It appears that a large part of the weakness has taken place this year alone, with the stock down by 37% in 2024 alone!

Ostensibly, the long and short-term weakness of the stock may have made a few investors wary of pursuing this name, but we think there could be some merit in considering it at these levels.

Ongoing WebHelp Integration Progress Warrants A Better Valuation Multiple

Last year CNXC was in the news for its merger with another CX expert- Webhelp which will end up raising the company’s competitive profile by enabling to it provide more holistic end-to-end CX solutions. Crucially, it will also give it added exposure to the EMEA region which previously only accounted for 15% of group revenue (now it will more than double to 33%) but is perceived to be a key region by a lot of clients. There have already been examples of this in Q1 with management pointing to a recent win with a European retailer, a services client of Webhelp, that wanted to leverage Concentrix’s expertise in generative AI agent automative technology, amongst other things.

Unlike a lot of M&A that can be inimical to the overall financials, this transaction will rather boost CNXC’s overall profile. The uplift in sales growth shouldn’t come as any great surprise (CNXC’s topline had grown at 17% CAGR over the past 3 years, this year’s topline growth is expected to double to over 34%), but what you also have is an improvement in the EBITDA margin profile from previous levels of 16% to 17%.

Integration efforts appear to be progressing well, and management is still on course to bring through $75m of cost synergies this year, followed by another $25m next year, and $20m in the final year. All these developments will reflect very favorably on CNXC’s medium-term earnings profile.

As per consensus estimates, this year, the expectation is for more than a doubling of group EPS to $11.92; interestingly enough, do note that the current consensus number is still below the mid-point ($12.1) of management’s FY24 guidance of $11.69 to $12.5, so there’s still potential for further upside surprises as we progress through the year. Crucially, despite a strong base year impact with an earnings growth threshold of 108%, note that earnings through the next two years (through FY26) are expected to come in at a 2-year CAGR of double-digit levels.

All in all, for such sturdy levels of bottom-line earnings growth, it feels like a bit of a farce to see CNXC priced at a 1 year forward P/E of just 4.67x (also implying a PEG of roughly 0.5x), which represents a massive 56% discount to its average multiple since listing.

Better FCF Prospects Through The Rest of FY24 Will Support Deleveraging Efforts

One of the reasons why the market may not be warming up to CNXC is perhaps the heightened level of debt that it currently carries on the balance sheet. Driven by the Webhelp transaction, CNXC is currently carrying over $5bn of financial debt on its balance sheet (this translates to 3x net leverage), and its unsecured debt makes it particularly vulnerable given high variable rate obligations. All in all, one can see that the interest coverage ratio which stood at over 40x, has recently fallen down to less than 2x.

Then in Q1, cash flow generation which is typically always positive and quite robust, came in quite weak with operating cash flow of -$47m and negative FCF of -$103 m. Given the already heightened leverage challenges, investors could be excused for experiencing some trepidation on account of the status quo. However, what’s key to note is that Q1 typically faces some seasonal weakness, and compounding the issue, the company also had to deal with a one-off client payment delay, which has already been received in Q2. Crucially, despite including acquisition and integration costs, CNXC still looks on course to generate $700m of positive FCF for the FY. After negative FCF of over 103m in Q1, we could be looking at a positive FCF of around $267m per quarter through the next 3 quarters. This will do a world of good for the leverage position, and see the company bring it down to 2.5x net leverage, before attempting to hit 2x by next year.

Closing Thoughts- Technical Considerations

The Pacer US Exports portfolio focuses on large-and-mid-cap US stocks which generate a large proportion of foreign sales combined with strong FCF growth, and CNXC is one of the names that makes the cut. You ideally want to buy CNXC when its relative strength ratio (RS), versus its peers from this landscape, is a long way off its long-term average, as the prospects of mean-reversion look a lot better. Currently, we have something akin to that, with the current RS at record lows, and almost 60% off its long-term average.

Now switching over to CNXC’s standalone price imprints, there are both good and bad developments. Firstly, note that from 2021 until now, the stock has pretty much traded within a certain descending channel (marked by the two downward-sloping black lines). In Jan this year, it looked like the price would break out from the upper boundary, but that fizzled out quickly and we saw some strong selling until March. Now from March until now, we’ve seen the selling abate, with the price action showing signs of flattening out, which is always a good sign when you’re thinking of going long.

However, what puts us off a bit is that the price is now once again a lot closer to the upper boundary of its long-term channel, than the lower boundary, and this dampens some of the enthusiasm for a long position.

Investors may also want to consider that after months of only insider purchases, in late April and in May, we’ve seen some signs of insider selling. Crucially also consider that smart money hasn't quite used the flattening of the price action to buy into the CNXC counter, rather they've chosen to diminish their aggregate net shares owned by around 15%.

However, what could perhaps abet the shares is a likely spike in buyback momentum in the months ahead. Almost 4 years back, CNXC had kickstarted a $500m share buyback plan, and at the end of Q1, they still had around $268m yet to be bought back.

More recently, the share buyback run rate per quarter has come in at less than $24m, but we would expect this to go up to the $30m mark, as management reiterated their plans to spend $100m in buybacks through November 2024.

The Alpha Sieve