It's been a rough ride that's for sure. I think one of the biggest challenges is cash conversion - NWC, which has historically been source of cash, has cumulatively soaked up $144mn of cash over the last seven quarters - because of that NWC drag, actual FCF has been minimal. They're in the process of switching ERP systems (for a second time), and you'd think stuff like AR days would improve post that transition (and AR days are pretty high right now). If NWC was flat (no credit for unwinding), it looks like CTS is trading at a ~15% NTM FCF yield, which is pretty cheap. They are saying a lot of the right things, like "our stock is the best acquisition we can make", and there *should* be plenty of cash to repurchase shares and deleverage if NWC stops being a drag. In my view, if they address the NWC problem, the narrative changes and it would be hard to see how share price stays here for long - if they don't fix the NWC problem, then they'll be handcuffed from doing anything (M&A, buybacks, deleveraging) for a long time. Organic growth has been a little lackluster, but at this price it doesn't really matter.
After listening to the Q1 Earnings Call their shift in the M&A strategy sounds very reasonable to me. I liked that they seem to be flexible about their capital allocation strategy when the conditions change. At the current stock price to me, it looks like a very good move to buyback stock and focus on growing organically. I only don't like the idea of a dividend to attract a broader group of investors. It looks like a 'cheap' move to try to move the stock price higher.
I would like to know your opinion as well and thank you for your exceptional article.
I agree with you that being flexible with capital allocation is good to see - if they view the "acquisition" of their own stock as more compelling risk/reward than the acquisition of new businesses, that's a prudent move. I also agree that the dividend was disappointing - I would have massively preferred if they hadn't done that, and instead repurchased more of their own shares.
Hello 10th Man,
Would appreciate your take on the Q1 results and change of strategy.
Thanks.
Hi 10th man,
I’m curious what your thoughts are now given the large drop in share price since this deep dive
It's been a rough ride that's for sure. I think one of the biggest challenges is cash conversion - NWC, which has historically been source of cash, has cumulatively soaked up $144mn of cash over the last seven quarters - because of that NWC drag, actual FCF has been minimal. They're in the process of switching ERP systems (for a second time), and you'd think stuff like AR days would improve post that transition (and AR days are pretty high right now). If NWC was flat (no credit for unwinding), it looks like CTS is trading at a ~15% NTM FCF yield, which is pretty cheap. They are saying a lot of the right things, like "our stock is the best acquisition we can make", and there *should* be plenty of cash to repurchase shares and deleverage if NWC stops being a drag. In my view, if they address the NWC problem, the narrative changes and it would be hard to see how share price stays here for long - if they don't fix the NWC problem, then they'll be handcuffed from doing anything (M&A, buybacks, deleveraging) for a long time. Organic growth has been a little lackluster, but at this price it doesn't really matter.
Thank you!
After listening to the Q1 Earnings Call their shift in the M&A strategy sounds very reasonable to me. I liked that they seem to be flexible about their capital allocation strategy when the conditions change. At the current stock price to me, it looks like a very good move to buyback stock and focus on growing organically. I only don't like the idea of a dividend to attract a broader group of investors. It looks like a 'cheap' move to try to move the stock price higher.
I would like to know your opinion as well and thank you for your exceptional article.
Thanks
I agree with you that being flexible with capital allocation is good to see - if they view the "acquisition" of their own stock as more compelling risk/reward than the acquisition of new businesses, that's a prudent move. I also agree that the dividend was disappointing - I would have massively preferred if they hadn't done that, and instead repurchased more of their own shares.