On Thursday, Stifel analysts began covering shares of Converge Technology Solutions Corp (CTS (NYSE:CTS):CN) (OTC: CTSDF), issuing a Hold rating and setting a price target of C$4.00.
The company, currently generating annual revenue of $1.89 billion with EBITDA of $103.8 million, is transitioning towards a services and software-led business model, which analysts believe will contribute to stronger organic growth through more consistent revenues and improved margins and cash flows. According to InvestingPro analysis, the stock appears to be trading below its Fair Value, suggesting potential upside opportunity.
Converge Technology Solutions' pivot to offering more end-to-end engagements and expanding customer wallet share in the mid-market IT services sector is noted as a positive development. However, challenges remain due to the current state of the hardware segment, which represents about half of the company's revenues.
According to Stifel, there is limited visibility for a rebound in hardware spending, which is a concern for the company's growth trajectory. InvestingPro data reveals strong free cash flow of $236.2 million, with management actively buying back shares - just one of several key insights available in the comprehensive Pro Research Report.
Despite recent strengths in free cash flow (FCF) and the potential for increased share buybacks or a Substantial Issuer Bid (SIB), the analysts mentioned that investor sentiment might not significantly improve until there is more clarity on the future of Converge Technology Solutions' hardware business and its capacity to sustain a recovery.
Stifel's analysis includes a proprietary IT spending survey that points to a cautious outlook for hardware expenditure. The analysts concluded their initial coverage by acknowledging the potential for a shift in discretionary spending that could lead to pent-up hardware demand or an acceleration in the services and software segments that may compensate for hardware softness.
In other recent news, Converge reported its Q3 2024 results, highlighting strategic growth and commitment to shareholder returns, despite a decline in gross sales and macroeconomic challenges.
The company's operating cash flow stood at $48.9 million, with an adjusted EBITDA of $32.1 million. However, this represented a 22.2% decrease year-over-year. Converge returned $10 million to shareholders through share repurchases and dividends in Q3 and reported a net loss of $3.3 million.
Converge is investing in strategic growth areas such as AI, Cloud, and Cybersecurity, which experienced double-digit growth. The company also launched a new ERP system in North America, aiming to optimize operations by 2025. Despite the challenges, the company's revenue for fiscal 2024 is projected to be between $2.5 billion and $2.56 billion, with a gross profit expected to range from $678 million to $691 million.
These recent developments emphasize Converge's focus on growth and shareholder returns. While facing headwinds, the company remains optimistic about 2025, expecting an uptick in device sales and benefits from the ERP rollout. It is also exploring options for an aggressive stock buyback program, demonstrating its commitment to shareholders.
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