I have not covered shares of CBIZ, Inc. (NYSE:CBZ) before, yet as the business announced a substantial acquisition, it is time to establish a thesis on this business. I see a long-term growth compounder which has leveraged organic growth with bolt-on dealmaking.
However, over time, CBIZ has commanded very high valuations, as a substantial acquisition now marks a deviation from its bolt-on acquisition strategy. I have some questions on this deal, and while I like the sell-off in isolation towards the deal, overall valuations remain too demanding to see appeal just yet.
An Advisory Business
CBIZ provides financial, insurance and advisory services which are tailor-made to clients and their businesses. The company serves over a hundred thousand clients with a team of nearly 7,000 members, spread over a hundred offices across the US.
On a $1.6 billion revenue base in 2023, the company mostly relies on financial services being offered, in aggregate responsible for about three quarters of revenues. This includes services like accounting & tax, financial advisory, transaction advisory, valuation, risk advisory, among others. These activities combined generate about $1.2 billion in sales, while posting operating margins around 16% on a segment basis.
The remainder of sales were mostly generated from benefits & insurance services like employee benefits consulting, payroll, retirement and investment solutions, complemented by a tiny technology support business. This is a near $400 million business, with segment margins posting near 19% of sales.
The advisory business is quite interesting for investors as CBIZ provides essential and recurring services, benefiting from high retention numbers, consistent cash flows and a variable expense base. In fact, about three quarters of sales are generated from recurring operations, with the remainder being project related work.
Being a capital light business, the company has been pursuing bolt-on M&A to grow the business. In fact, it has more than doubled from being a $700 million business a decade ago, as high single digit operating margins have gradually risen towards the 10% mark.
All this has unleashed the stock in a huge way. A mere $10 stock in 2014 rose towards the $20 mark early in 2020, and in a gradual fashion shares have even risen to a high of $86 in recent trading.
Picking Up The Performance
In February of this year, CBIZ reported an 11% increase in 2023 sales to $1.59 billion, with organic growth reported around 7%. GAAP earnings of $121 million came in at $2.39 per share, with adjusted earnings posted two pennies higher. Net debt of $313 million was perfectly reasonable, with adjusted EBITDA of $223 million working down to a mid-1 times leverage ratio.
The company outlined a solid guidance for 2024, seeing total sales up by 7-9% with both GAAP and non-GAAP earnings seen advancing by low double-digits to $2.70-$2.75 per share. With shares trading in the mid-sixties in February, this translated into a 24 times forward earnings multiple, in part because of the solid track record of the business, although expectations were getting a bit hot. With 50 million shares trading at $65 at the time, the company commanded a $3.25 billion equity valuation, and a near $3.6 billion enterprise valuation, at just over 2 times sales.
The company furthermore announced two smaller bolt-on deals during the first quarter. In January, CBIZ announced the purchase of Erickson, Brown & Kloster, adding $9 million in annual sales. In March, the acquisition of CompuData was announced, with the deal adding $20 million in sales.
A Big Deal
The real news came on the final day of July, as the company announced the purchase of the non-attest business of Marcum, creating the country’s seventh-largest accounting service provider in the US with a pro forma revenue base of $2.8 billion.
The deal is valued at $2.3 billion, half of which would be paid in cash and the remainder payable in stock. Marcum adds some $1.2 billion in sales, 35,000 clients and 3,500 workers to its business. This values the business at 1.9 times sales, while CBIZ was valued at 2.2 times at $65 per share (and a higher multiple based on recent trading action).
The company claims that the deal will be accretive to 2025 earnings, with adjusted earnings per share seen up around 10%. This comes as the purchase price is equal to 12.0 times EBITDA, which suggests 16% margins. In comparison, the margins reported by the business itself come in around 14% of sales.
In connection to the deal, some 14 million shares will be issued, bringing the total share count to 64 million shares. With about $1.15 billion in cash involved in connection to the deal and a prevailing net debt load of $376 million, I peg pro forma net debt around $1.5 billion. With pro forma EBITDA seen around half a billion, this results in a 3 times leverage ratio, as the company sees net leverage around 3.25-3.50 times upon closing in the deal presentation.
A Nosedive
Shares of the company fell from $86 to $69 upon the deal announcement, down $17 per share, for a $850 million decline in response to the deal announcement, as this number excludes the shares issued to pay for Marcum.
Part of this is due to with a small cut in the guidance as well, with the business seeing adjusted earnings down six cents to $2.64-$2.69 per share. Moreover, it appears that the market did not like the deal much because of the assumption of debt and the reversal of the bolt-on acquisition strategy.
With the relative multiples looking quite reasonable and pro forma earnings seen close to $3 per share upon consummation of the deal, the appeal is increasing. Trading at $69, shares still command a premium of 23 times earnings multiple, all while pro forma leverage will be quite high. Even down 20% from its highs, shares are back to the levels seen in February already, as I have some mixed thoughts on this.
What Now?
The reality is that CBIZ, Inc. has a great long-term track record here, and actually shares have risen substantially in recent times, to levels representing too much of a premium. The reaction in isolation to the deal feels like an overreaction and naturally would make me interested, yet the contrary is the case as well, as the standalone valuation was already rich.
All this makes me perform a balancing act. I want to keep a close eye on shares of CBIZ from here, but I am not buying the dip following this huge and transformative M&A deal which is set to grow its revenue base by three quarters.
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