On Friday, RBC Capital Markets reinstated coverage on First Advantage Corporation (NASDAQ:FA) stock with an Outperform rating and a price target of $22.00.
The firm's analyst highlighted the company's "5.0 strategy" and its use of advanced technology platforms, including artificial intelligence (AI), machine learning (ML), and robotic process automation (RPA), as key drivers for future growth.
These technologies, alongside First Advantage's proprietary database, which contains over 765 million records, are expected to generate new customer wins and enhance cross-selling and up-selling opportunities.
The recent acquisition of Sterling has nearly doubled First Advantage's market share and is anticipated to substantially boost the company's digital identity capabilities. The analyst noted that this strategic move is projected to create between $50 million and $70 million in cost synergies.
As a result, the pro-forma margins of the combined company are expected to increase from 27% to a range of 30-31% by the fiscal year 2027.
The report also provided insights into the company's financial strategy, detailing plans to reduce net leverage from approximately 4.4 times pro-forma to around 3 times by the end of the fiscal year 2026. This reduction is expected to be fueled by strong free cash flow (FCF) and earnings before interest, taxes, depreciation, and amortization (EBITDA) growth.
RBC Capital Markets forecasts that these financial and operational strategies will yield a high-teens earnings per share (EPS) compound annual growth rate (CAGR) over the next three years.
The analyst's positive outlook underscores the potential for First Advantage's stock performance, driven by strategic acquisitions, technological advancements, and financial discipline.
In other recent news, First Advantage Corporation announced steady growth in its recent earnings call, following the completion of its $2.2 billion acquisition of Sterling.
The acquisition has notably expanded First Advantage's reach, with combined revenues reaching $1.5 billion and an adjusted EBITDA of $407 million for the twelve months ending September 2024.
Despite economic challenges, the company reported stable Q3 revenues of $199.1 million, while maintaining its focus on synergy targets and technological growth.
First Advantage's acquisition of Sterling has effectively doubled its size, with the company aiming for $50 million to $70 million in run-rate synergies within two years. The company's 2024 guidance projects total revenues between $858 million and $918 million, with an adjusted EBITDA of $250 million to $274 million. New features, such as a customer support chat service, are expected within four to six months.
CEO Scott Staples and President Joelle Smith provided insights during the earnings call, outlining the company's strategy and future outlook. They reassured that customer service would not be disrupted during the integration process and emphasized the company's commitment to reducing net leverage to around three times run-rate adjusted EBITDA within 24 months post-acquisition. These recent developments demonstrate First Advantage's strategic growth and stability amidst economic challenges.
InvestingPro Insights
Adding to RBC Capital Markets' positive outlook on First Advantage Corporation (NASDAQ:FA), recent data from InvestingPro provides further context to the company's financial position and market valuation.
First Advantage boasts impressive gross profit margins, with the latest data showing a gross profit margin of 49.48% for the last twelve months as of Q3 2023. This aligns with the analyst's expectations of improved margins following the Sterling acquisition.
The company's market capitalization stands at $3.08 billion, reflecting its significant presence in the industry. While the P/E ratio is high at 527.75, the adjusted P/E ratio for the last twelve months is a more modest 99.3, suggesting potential for future earnings growth.
InvestingPro Tips highlight that First Advantage operates with a moderate level of debt and that its liquid assets exceed short-term obligations. These factors support the company's plan to reduce net leverage, as mentioned in the RBC Capital Markets report.
It's worth noting that InvestingPro offers 11 additional tips for First Advantage, providing investors with a comprehensive analysis of the company's financial health and market position.
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