Should you be buying Converge Technology?

It’s a Canadian tech stock that did very well over the past year but has fallen off over the last few months. What’s going on with Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS) and is the stock a buy? Portfolio manager Kim Bolton recently weighed in on CTS, saying there’s likely a bit of upside to the stock over the next 12 months.

“This is a great Canadian story,” said Bolton, president of Black Swan Dexteritas, who spoke on BNN Bloomberg on Tuesday. “It very much reminds me of how Constellation Software built their business.”

“What Converge Technology Solutions does is they’ve built up a portfolio of IT service providers and that portfolio allows them to go out to clients and offer multi-vendor technology solutions,” Bolton said. “Their solutions come in two forms: one form is like a blockchain structure for data centre infrastructure and then also IT spend solutions for analytical and cloud delivery.”

“It’s a big company — it’s a $2.2 billion company, so it’s a great Canadian story,” he said.

Toronto-headquartered Converge Technology saw its share price scoot ahead both over the tail end of 2020 and then again between April and September of 2021. That movement took CTS from a buck and change at the start of 2020 to as high as $12.00 as of this past November. but the stock has pulled back along with the overall rotation away from growth and tech through the past few months and is now trading just under $10.00 per share.

Bolton says there’s room to grow in 2022 for Converge.

“We don’t own it. We watch it very, very carefully but we don’t own it right now,” Bolton said. “It’s got about a 20 per cent upside from here. 12 month upside, currently trading at about $10. For us together with the other analysts the average 12-month price target on Converge is $12.32.”

Converge has definitely been growing its business of late, both organically and though acquisitions. For the company’s full 2020, CTS saw revenue jump 38 per cent to $948.8 million as the company expanded its reach into new geographical areas. But that expansion hasn’t seemed to dip into profits as that same full 2020 saw adjusted EBITDA grow from $31.6 million in 2019 to $60.5 million in 2020.

For the just finished year, Converge looks to have taken another big step forward. Its most recently reported quarter shows revenue up 93 per cent year-over-year to $367.3 million and adjusted EBITDA up a further 29 per cent to $18.9 million for the Q3. 

CEO Shaun Maine said Converge is executing well on its build-out and roll-up strategy. 

“The Company continues to invest in talent and expand its service capabilities to its customers across North America and Europe, as reflected in our very impressive recurring revenue managed services growth,” said Maine in the company’s third quarter 2021 press release. 

“Additionally, the Company ended the quarter with $210 million of cash on-hand driven by extremely strong free cash generation from our business, with $190 million in available capacity under our ABL credit facility,” Maine said.

The company has made a few acquisitions since the end of the third quarter, buying business analytics and professional services company LPA Software Solutions in October, then CTS’ 53-per-cent owned subsidiary Portage CyberTech acquired digital services company OPIN Digital in December and in January Converge acquired Paragon Development Systems, a cloud, security and infrastructure services company based in Wisconsin for $52 million. All told, Converge and its affiliates have now completed 26 acquisitions since October 2017.

Commenting on the Paragon Development Systems buy, Paradigm Capital analyst Daniel Rosenberg said the deal bolsters Converge’s footprint in the US Midwest, while the company remains primed for further M&A with $222 million in cash as of its last reporting period and a credit facility which it increased in December from about $190 million to about $300 million. 

Rosenberg said there’s a large opportunity for Converge to expand and cross-sell and that should lead to a higher share price over the long term.

“CTS’s strategy is aligned with IT spending trends in cloud and COVID-19 has been a catalyst for further investment in the area,” said Rosenberg in a research note to clients on January 11. “CTS has strong strategic partnerships with cloud technology leaders, including VMware, Red Hat, Microsoft Azure, Amazon Web Services and Google, which highlight its capabilities in serving complex IT networks. These relationships support high-margin managed service revenue.”

“In addition to strong organic growth, the company is executing a disciplined M&A model. With eyes set on international expansion, CTS offers investors a strong growth profile, proven execution, and an attractive valuation,” Rosenberg wrote.