A diverse customer base is a hallmark of many a successful company: keeping your eggs in different baskets is a great way to minimize the risk of any given one ending up on the ground. A prime example of such a company is GP Strategies (GPX, Financial), a global performance-improvement company servicing more than than 16 industries, including health care providers, electronics companies, financial services firms and government bodies.
GP Strategies provides clients in these fields with sales and technical training, e-learning, management and engineering consulting, as well as services such as safety and regulatory compliance assistance. Whilst the stock has been going through a bit of a rough patch in the last few months, there is reason to believe things may pick up in 2018. In this article, we compare the bear and bull theses.
A difficult 2017
GP Strategies’ financial performance in 2017 was, to put it bluntly, not good. The share price is down almost 27% from its yearly high of $31.25 and is currently trading at $22.90. The dip has largely been the result of a poor showing in the third quarter of 2017, where earnings per share came in at 19 cents, underperforming the consensus of 26 cents.
Revenue growth has also been disappointing. The company posted figures of $131.5 million for the fourth quarter, up just 3.3% year over year, missing analyst expectations. The operating margin was down 4.2% year over year.
Net income is also down year over year – just $12.9 million compared with $20.2 million in 2016, a 36% decline. This last was mainly due to an increase in selling, general and administrative expenses (SG&A), coupled with sluggish revenue growth.
To make matters worse, debt has increased significantly year over year. There was almost $50 million in debt on the books in 2017, compared with $30 million in 2016. The company has almost $24 million in cash or equivalents, which should go some way to reassuring its creditors. Even so, a 66% increase in debt is not a welcome development, particularly with earnings declining quite precipitously.
Overall, as can be seen from these figures, it is unsurprising the stock has been hammered of late.
The good news
There may be some light at the end of the tunnel for shareholders of GP Strategies, however. Here are two factors that could be catalysts for change in 2018.
- Cost cutting. As of the beginning of 2018, management has restructured GP Strategies, consolidating what were previously four discrete business units into two. The Learning Solutions and Professional and Technical units have now become The Workforce Excellence Program, whereas what used to be the Performance Readiness Sandy Training and Marketplace segments has now been merged into Business Transformation Services. This effort should go some way to bringing those SG&A expenses under control.
- Tax relief. While income tax expenses do not represent a huge burden for GP Strategies, the recent tax cuts have still obviously been a boon to the company. Furthermore, the Tax Cuts and Jobs Act will likely have a large indirect effect on the company, as it will allow its clients to spend more on its services.
- Mergers and acquisitions. The company is very active in the M&A market, having acquired more than 30 companies in the last decade. Only in 2017, management spent around $15 million on new purchases, including on companies based in the United Kingdom. This activity is likely to continue, further reinforcing an already diverse basket of subsidiaries.
- Share buyback. Management recently upped their share buyback scheme to $13.6 million. Historically, they have been active proponents of stock repurchasing, so it would not be surprising if they continued doing so in 2018.
Verdict
Overall, there is a case to be made that GP Strategies is currently oversold. Yes, financial performance in 2017 was poor, and the increase in debt is admittedly somewhat alarming.
That said, the company has been around for a long time. In addition, its management is clearly competent and recognizes the need to address structural issues, as can be seen from the massive internal consolidation that took place at the start of the year.
GP Strategies has an extremely diverse client base, with 31% of revenue coming in from foreign sales. Improving economic fundamentals will also drive demand for the company’s services. Whilst not a slam-dunk, there is clear growth potential in this company. But it is not one for the faint of heart.
Disclosure: I/We own none of the stocks discussed in this article.
(This article was co-authored by Stepan Lavrouk. Lavrouk is an investment analyst with Almington Capital.)
