Following the company’s second quarter results, Echelon Wealth Partners analyst Ralph Garcea is maintaining his lofty target on Pivot Technology Solutions (TSX:PTG).
On Monday, Pivot reported its Q3, 2017 results. The company lost (U.S.) $967,000 on revenue of $389.1-million, a topline that was up 6.5 per cent from the same period last year.
“Pivot made solid steps toward its transformation this past quarter, led by 28.9-per-cent growth in direct services,” said Kevin Shank, president and chief executive officer. “I am happy to say our core business, led by professional services, executed well in the quarter and all other service channels including fulfilment, project, work force and managed services gained momentum. In addition, TeraMach continued to achieve solid results across Canada. This translated into adjusted EBITDA growth compared with last year. At the same time, we’re making deliberate investments in our solutions and services business as well as other strategic initiatives such as the development of a proprietary software innovation that’s aimed at supporting the growing requirements of edge computing. These continued investments will advance our ongoing commercial transformation, which is focused on growing enterprise value.”
Garcea notes that Pivot’s topline was ahead of his expectation of $382-million, but the company’s bottom line fell short of what he had modeled. The analyst addressed the issue of the company’s margins, where he expects to see great improvement.
“We see EBITDA margins doubling from 2% to 4% over the next few years as PTG takes its higher-margin Managed Services business from ~11% of revenues today to 30%,” the analyst says. “The strategic value of Managed Services comes from: (1) closer client relationships driving increased share of IT spend wallet; (2) differentiation from the generic VAR “box pusher”; (3) recurring revenue with typical three-year deals that provide better visibility and predictability; and (4) increased gross margins versus just hardware sales. We estimate every 1% increase in EBITDA adds ~$2 in value to equity holders.”
In a research update to clients today, Garcea maintained his “Buy” rating and one-year price target of $5.50 on Pivot Technology Solutions, implying a return of 143 per cent at the time of publication. He rates the stock as a “top pick”.
Garcea thinks Pivot will generate EBITDA of $26-million on revenue of $1.56-billion in fiscal 2017. He thinks those numbers will improve to EBITDA of $46-million on a topline of $1.64-billion the following year.