On Tuesday, B.Riley reiterated a Buy rating on Donnelley Financial Solutions (NYSE:DFIN) with a consistent price target of $80.00. The firm anticipates Donnelley Financial to report third-quarter 2024 earnings on October 31 before the market opens, expecting an at least in-line performance.
Projected revenues and adjusted EBITDA are estimated at $182.9 million and $52.4 million, respectively, slightly above the Street's expectations of $181.6 million and $50.2 million.
The analyst highlighted that the sentiment towards the company's stock is closely tied to the progression of deal flow in the capital markets. Despite a year-over-year decline of about 40% in deal flow and transactions-related business at the end of fiscal year 2022, Donnelley Financial's compliance-filings-related business, particularly its software component, has been performing well.
The software revenues are expected to double by fiscal year 2026, continuing a trend of doubling over the previous four years.
For the third quarter, transactions are projected to be down 14% year-over-year from the already low levels of fiscal year 2023. However, the company's software for compliance-related business, including ArcSuite and Active Disclosure, is anticipated to maintain its growth trajectory.
The firm's third-quarter results are likely to align with the company's previous guidance, anticipating revenues between $175 million and $185 million and an adjusted EBITDA margin in the mid-to-high 20s, implying an adjusted EBITDA of approximately $50 million.
The analyst emphasized Donnelley Financial's solid gains in software and high margins, which are expected to support the company's overall growth and profitability, even with a projected year-over-year decrease in deal flow for the year.
The company has been transitioning towards a higher-margin sales mix and improved capital structure, establishing itself as a leading provider of workflow automation software. This transition has included paying down debt, reducing print exposure, and enhancing overall margins.
With the company's stock trading at approximately 7.5 times fiscal year 2025 estimated enterprise value to EBITDA, the analyst suggests that there is potential for multiple expansion, given Donnelley Financial's strength in software and the possibility of an increase in deal flow. The $80 price target is based on an estimated 9 times fiscal year 2025 EV/EBITDA.
In other recent news, Donnelley Financial Solutions has reported substantial improvements in Q2 for 2024, including significant revenue growth, record quarterly adjusted EBITDA, and increased cash flows. A key driver of these positive developments is the firm's shift towards a software-centric model, which has resulted in double-digit growth in software solutions, particularly their virtual dataroom product, Venue.
Despite a slight decrease in net sales in their capital markets compliance and communications management segment, Donnelley Financial projects a stronger second half of the year, driven by new regulations and product offerings.
The company's Q2 report also revealed a 14.4% year-over-year organic growth in software solutions net sales, with Venue experiencing approximately 38% sales growth. Donnelley Financial ended the quarter with $179.6 million in total debt, and an expanded adjusted EBITDA margin of 35.9%.
Looking ahead, the company anticipates consolidated net sales between $175 million to $185 million for Q3 2024, with an adjusted EBITDA margin projected in the mid-to-high 20s range.
An analyst from Needham recently reaffirmed a positive outlook on Donnelley Financial Solutions, maintaining a Buy rating and a price target of $79.00. The analyst highlighted the company's effective balance of efficiency and profitability, growth in key areas such as software, and disciplined management in capital returns, balance sheet management, and merger and acquisition activities.
The analyst's positive stance was further bolstered by the belief that increased activity in the capital markets could provide additional benefits to Donnelley Financial's robust business foundation.
InvestingPro Insights
To complement B.Riley's analysis of Donnelley Financial Solutions (NYSE:DFIN), recent data from InvestingPro offers additional perspective on the company's financial position and market valuation. DFIN's P/E ratio stands at 17.75, with an adjusted P/E of 15.68 for the last twelve months as of Q2 2024. This relatively modest valuation is particularly interesting given the company's strong financial performance.
InvestingPro Tips highlight that DFIN is trading at a low P/E ratio relative to its near-term earnings growth, with a PEG ratio of 0.61. This suggests that the stock may be undervalued considering its growth prospects, aligning with B.Riley's view on potential multiple expansion. Additionally, DFIN boasts a perfect Piotroski Score of 9, indicating strong financial health across various metrics.
The company's revenue for the last twelve months as of Q2 2024 was $802.6 million, with a gross profit margin of 61.2% and an operating income margin of 19.86%. These figures underscore DFIN's ability to maintain profitability, which is crucial as it continues its transition towards higher-margin software sales.
For investors seeking more comprehensive analysis, InvestingPro offers additional tips and insights beyond those mentioned here. The platform currently lists 7 more tips for DFIN, providing a deeper understanding of the company's financial position and market outlook.
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