Echelon Capital Markets analyst Rob Goff has pushed his target lower on Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS) but he’s staying bullish on the stock and company, saying in a Thursday report that the fundamentals are solid as Converge looks to show improved organic growth rates.
An IT solutions provider for the North American market, Converge reported its second quarter earnings on Wednesday, coming in with revenue up 29 per cent year-over-year to $665.8 million and adjusted EBITDA of $41.5 million compared to $39.2 million a year earlier.
“Converge continued to execute on its cross-sell strategy throughout the second quarter and drove high value solutions with clients by leveraging our advisory, implementation, and managed services across all practice areas,” said Greg Berard, Converge Global CEO, in a statement.
“Today 60 per cent of Converge sales representatives in North America are now driving more than four solution areas with their clients,” he said.
Looking over the numbers, Goff said the $665.8 million topline compared to his forecast at $640.6 million and the consensus at $640.7 million, while EBITDA at $41.5 million was in-line with the analyst’s call at $41.7 million and a hair above the Street at $41.1 million.
Goff said the revenue outperformance is impressive and the company’s bookings remain strong at a backlog of $447 million.
“We continue to see underlying fundamental value in the shares. Q223 results continued the trend of bookings, revenue, and gross profit outperformance while EBITDA for the most recent two quarters has been largely in line with expectations,” Goff wrote.
The analyst said investors appear to be looking for evidence of improved efficiencies on an operating perspective from CTS, to be registered in EBITDA margin gains, while further clarity on free cash flow is also top of mind.
“With acquisitions on hold and the focus on organic growth, we see gains where CTS delivers 2023 results in line with expectations. We could see revenues and gross profit forecasts for the year modestly upgraded following the quarter while EBITDA remains unchanged or cautiously trimmed by $2-4 million,” he said.
CTS shares have fallen hard over the past two years, going from about $12 in September 2021 to now below $3 per share. The stock dropped almost 11 per cent in trading on Thursday.
Goff maintained a “Speculative Buy” rating on CTS while dropping his target from $6.00 to $5.40, which at press time represented a projected one-year return of 86 per cent.
“We are moving our price target from $6.00 to $5.40 as we look for improved free cash flow generation, efficiency gains and the prospective sale of the Company’s shares in Portage,” Goff said.