CONVERGYS CORP CVG
December 02, 2013 - 12:07pm EST by
SpocksBrainX
2013 2014
Price: 20.00 EPS $1.10 $1.20
Shares Out. (in M): 108 P/E 18.4x 0.0x
Market Cap (in $M): 2,158 P/FCF 0.0x 0.0x
Net Debt (in $M): -591 EBIT 0 0
TEV ($): 1,567 TEV/EBIT 0.0x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

Thesis:  No-moat Call Center Convergys is a simple idea with a fat cash balance and plenty of free cash flow trading at a reasonable valuation.
 
This business was nicely described by bank999 in a previous posting at a much better price (so please see that) but I still think the stock has potential for those who are ok with really boring ideas.  Here is why I like the business:
 
*great BS.  Company has 591m in cash (60% domestic) or 27.4% of the current market cap.
*significant FCF.  TTM gross cash flow (ni + da) is 208m with CapEx of 82m or FCF of 126m or an 8% FCF yield
 
*pays a dividend and buys shares - company recently instituted a modest dividend and is buying its own shares (100m buyback ytd to Q3)
 
*plans on acquisitions - see previous note and related commentary - concern has always been that CVG might make a value destroying acquisition but past couple years management has shown restraint and specifically addressed valuation in the latest call (CFO:  "And are they willing to transact at a valuation that is reasonable?  Because we trade at roughly 6x EBITDA we have to think about the option of using our capital to buy back our shares as an alternative to M&A").  While this doesn't guarantee sanity from pressure to 'put the cash to use' management seems to have gotten the message that cash is not trash. 
 
*overly modest EPS estimates.  VL for one estimates $1.15 next year or 5% growth yoy which can be achieved from the buyback alone and thus seems overly conservative.   Company has done some charges lately which could flow thru in a small way to next year (though I'm not going to try to quantify them).   If they make $1.10 this year on 108m shares, making $1.20 next year on 103m shares wouldn't be much of a stretch. 
 
Course, there are some obvious issues here:
 
*heavy customer concentration.  ATT, Comcast, and DIRECTV represented 23.1%, 12.4%, and 12.3% of sales in 2012 which similar concentration in previous year.  Course, this can also be looked on a positive (confidence in CVG) but any disruption in these relationships could hurt the business. 
 
*top line is modest and hard to forecast.  The stripped down version of CVG isn't going to produce much more than 5% top line growth in the best scenarios and 3% is probably more likely.  Company did suggest for past five or six quarters new signings have made, in their words, them "very happy" though overall signings thru Q3 this year are actually slightly lower than last year at this time.  While CVG gives some granularity on customer concentration and performance in top 20 accounts at least on my level there is not way to actually forecast these numbers beyond what management tells you.  I could give some opinions on the future of the call industry but suffice it to say they aren't going away.
 

From the 10K:  Convergys handles more than 4 billion customer contacts per year. We have approximately 77,000 employees in over 70 locations across

the globe and in our work-at-home environment. We provide multilingual, multichannel customer care with a global service delivery

infrastructure that operates 24 hours a day, 365 days a year.

*no-moat.  The previous posting gives some good thoughts on why this sort of business is underappreciated for good reason - call centers don't exactly call for investor enthusiasm and past capital allocation history has to give one pause.   As others pointed out in the thread in that previous post, it is hard to see what synergies could be gained from many acquisitions here so you have to hope management remains calm and rational with their fat cash balance sheet in looking for the right opportunities.
 
*Significant exposure to the Philippines.   I haven't finished this section in my evaluation but CVG has a significant presence  in the Phillipines and while there have been on announcements on work stoppages I am unsure what if any impact there has been with the recent typhoon.  I will update this when I hear an update from the company
 
Bottom line:  This is not the most exciting idea in the world but CVG is a solid company with a great balance sheet generating lots of cash while trading at an attractive valuation.  Given any sort of success with acquisition activity earnings could be substantially understated.  Put another way, even if the company sees flat cash flow in three years the business would generate more than 620m on an EV of 1567.  It is also so boring a business model that declines in the stock price can be used as buying opportunities so since few people are truly interested in ideas like this.
 
 
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

No obvious one - investors attracted to 8% FCF yields and strong balance sheets in an expensive market
    sort by   Expand   New

    Description

    Thesis:  No-moat Call Center Convergys is a simple idea with a fat cash balance and plenty of free cash flow trading at a reasonable valuation.
     
    This business was nicely described by bank999 in a previous posting at a much better price (so please see that) but I still think the stock has potential for those who are ok with really boring ideas.  Here is why I like the business:
     
    *great BS.  Company has 591m in cash (60% domestic) or 27.4% of the current market cap.
    *significant FCF.  TTM gross cash flow (ni + da) is 208m with CapEx of 82m or FCF of 126m or an 8% FCF yield
     
    *pays a dividend and buys shares - company recently instituted a modest dividend and is buying its own shares (100m buyback ytd to Q3)
     
    *plans on acquisitions - see previous note and related commentary - concern has always been that CVG might make a value destroying acquisition but past couple years management has shown restraint and specifically addressed valuation in the latest call (CFO:  "And are they willing to transact at a valuation that is reasonable?  Because we trade at roughly 6x EBITDA we have to think about the option of using our capital to buy back our shares as an alternative to M&A").  While this doesn't guarantee sanity from pressure to 'put the cash to use' management seems to have gotten the message that cash is not trash. 
     
    *overly modest EPS estimates.  VL for one estimates $1.15 next year or 5% growth yoy which can be achieved from the buyback alone and thus seems overly conservative.   Company has done some charges lately which could flow thru in a small way to next year (though I'm not going to try to quantify them).   If they make $1.10 this year on 108m shares, making $1.20 next year on 103m shares wouldn't be much of a stretch. 
     
    Course, there are some obvious issues here:
     
    *heavy customer concentration.  ATT, Comcast, and DIRECTV represented 23.1%, 12.4%, and 12.3% of sales in 2012 which similar concentration in previous year.  Course, this can also be looked on a positive (confidence in CVG) but any disruption in these relationships could hurt the business. 
     
    *top line is modest and hard to forecast.  The stripped down version of CVG isn't going to produce much more than 5% top line growth in the best scenarios and 3% is probably more likely.  Company did suggest for past five or six quarters new signings have made, in their words, them "very happy" though overall signings thru Q3 this year are actually slightly lower than last year at this time.  While CVG gives some granularity on customer concentration and performance in top 20 accounts at least on my level there is not way to actually forecast these numbers beyond what management tells you.  I could give some opinions on the future of the call industry but suffice it to say they aren't going away.
     

    From the 10K:  Convergys handles more than 4 billion customer contacts per year. We have approximately 77,000 employees in over 70 locations across

    the globe and in our work-at-home environment. We provide multilingual, multichannel customer care with a global service delivery

    infrastructure that operates 24 hours a day, 365 days a year.

    *no-moat.  The previous posting gives some good thoughts on why this sort of business is underappreciated for good reason - call centers don't exactly call for investor enthusiasm and past capital allocation history has to give one pause.   As others pointed out in the thread in that previous post, it is hard to see what synergies could be gained from many acquisitions here so you have to hope management remains calm and rational with their fat cash balance sheet in looking for the right opportunities.
     
    *Significant exposure to the Philippines.   I haven't finished this section in my evaluation but CVG has a significant presence  in the Phillipines and while there have been on announcements on work stoppages I am unsure what if any impact there has been with the recent typhoon.  I will update this when I hear an update from the company
     
    Bottom line:  This is not the most exciting idea in the world but CVG is a solid company with a great balance sheet generating lots of cash while trading at an attractive valuation.  Given any sort of success with acquisition activity earnings could be substantially understated.  Put another way, even if the company sees flat cash flow in three years the business would generate more than 620m on an EV of 1567.  It is also so boring a business model that declines in the stock price can be used as buying opportunities so since few people are truly interested in ideas like this.
     
     
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    No obvious one - investors attracted to 8% FCF yields and strong balance sheets in an expensive market

    Messages


    Subjectcash = net cash
    Entry12/02/2013 12:10 PM
    MemberSpocksBrainX
    cash figure cited on BS is net cash (cash + inv - debt)

    Subjectmy rating
    Entry12/02/2013 02:21 PM
    MemberSpocksBrainX
    No reason to do it anymore but my rating here is a "6" on performance.  My keen and vast experience suggests this one could outperform the market over 3 years....

    SubjectConvergys to Acquire Stream for $820 Million
    Entry01/06/2014 04:26 PM
    Membersunshine
    Seems like a logical acquisition which provides customer diversification, scale and geographic reach. Convergys will be the second largest customer care organization globally, once acquisition closes.

    SubjectRE: Convergys to Acquire Stream for $820 Million
    Entry01/07/2014 12:46 PM
    MemberSpocksBrainX
    It essentially looks like CVG is buying a copy of itself - 820m for 120m EBITDA (6.8x) vs. at $21 CVG being at 6.7x EV/EBITDA (adj).  Hard to get too excited, but at least you can't say they grossly overpaid and they can pay the debt soon enough if desired.
      Back to top