Looking for a Canadian software company in the cloud computing sector? Small cap hybrid IT name Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSXV:CTS) might be right up your alley — although you might want to wait for a pullback, says Bruce Campbell of StoneCastle Investment Management.
“Converge has done phenomenally well here,” said Campbell, president at StoneCastle, who spoke about Converge in a segment on BNN Bloomberg on Tuesday. “They just keep adding new acquisitions. It’s one where you’ve seen especially in the last couple of weeks what kind of volatility some of these smaller companies can have, especially when the market turns kind of more discerning as far as how much risk it wants to take.”
“It’s one that if you didn’t own it right now, what I would probably look at doing would be to have a partial position, wait for it to pull back and then add the rest of your position,” Campbell said.
Converge has been up and down lately but over the course of its two-plus years on the TSX Venture, the stock has mostly been up. Since the start of 2019, CTS is now a ten-bagger, returning 1042 per cent and counting, with much of those gains coming in the last 12 months.
Converge’s share price has grown on pace with the company, which has proven itself to be an astute acquirer, having made 17 acquisitions since the fall of 2017. Since this past November alone Converge has bought US tech solutions company Workgroup Connections, Denver-based IBM analytics consulting company CarpeDatum, digital transformation business Vivvo Application Studios and cloud infrastructure company Vicom Computer Services for $32 million. That’s while also closing on two bought deals over the same period for $121 million combined.
“This is another company that during 2020 they raised money a few times and as they continue to make acquisitions they’ll probably continue to raise money,” Campbell said.
“From a valuation perspective and even with the stock price moving up as much as it has it’s actually reasonably priced. It’s not cheap and often technology isn’t, but it’s one that because they’ve been able to grow both through acquisition and also organically the numbers have grown at the same rate or maybe even faster than what the stock price has done,” he said.
“It’s one that from a technology standpoint it looks like they have tons of runway and room ahead of them here, and so if you don’t own it, sort of selectively buy it on a couple of trenches and maybe wait for for an offering to be done. It’s one that we like,” Campbell said.
Converge last reported earnings in early November where the company posted revenue up 31 per cent year-over-year to $189.9 million with adjusted EBITDA jumping a full 151 per cent to $14.6 million. Over the quarter, CTS acquired Texas-based IT solutions company Unique Digital for $9.3 million and had two equity offerings for $20.1 million and $34.5 million, respectively.
On the third quarter, Converge CEO Shaun Maine said in a press release the company is now a much stronger company as a result of its activities over the Q3.
“We enter the fourth quarter with a strong balance sheet and cost of debt that we estimate will generate $8 million of annual interest savings in addition to our significant SG&A savings. During the quarter, we completed the integration of another three back offices and the cost savings of these integrations and removing duplicated front office costs are reflected in the third quarter financial results with a $5.4 million sequential decrease in SG&A,” Maine said.
“In addition, shortly after the quarter we announced the acquisition of Unique Digital, a strong Dell and VMWare partner, which now gives us access to the very lucrative Texas marketplace,” he said.
In January, investment bankers Echelon Wealth Partners returned Converge to its Top Picks list for the first quarter 2021, with analyst Rob Goff saying the company’s acquisition of Vicom reestablished CTS’s momentum of larger acquisitions and highlights the company’s “copy/paste/accrete/repeat” formula.
“We look for the Company to move forward executing against its deep pipeline of strategic, accretive acquisitions. Our prior and current price target moves reflect the prospects of resumed momentum on the acquisition front where the Company’s ability to source and execute accretive deals has enabled it to achieve a scale where its cross-selling revenue generation, vendor advantages and platform efficiencies support continued accretive inorganic growth,” Goff said in a January 4 report.
“Furthermore, with its debt costs now lowered to roughly 2.5-3.0 per cent from 8-9 per cent, with cash reserves of ~$90 million (including ~$81 million raised through two equity issues) and the Company’s legacy acquisitions on-pace to be fully integrated onto one platform entering the new year, it is in its strongest position to date as an acquirer,” Goff wrote.
With his report, Goff reiterated his “Speculative Buy” rating for Converge while raising his target from $4.90 to $6.25, representing at the time of publication a projected one-year return of 25 per cent.