Thursday, April 23, 2020

An AIM Small Cap holding: ASGN Inc. (ASGN, $37.66): “Opportunities in the Cloud” By: Ronald Burgers, AIM Student at Marquette University. Financially able to weather the storm.

ASGN (ASGN, $37.66): “Opportunities in the Cloud”
By: Ronald Burgers, AIM Student at Marquette University

ASGN Acquires Blackstone Federal | Business Wire

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

  • ASGN Inc. (NYSE: ASGN) provides information technology and management services in digital, technology and engineering sectors in both commercial and government sectors. ASGN operates within three segments, Apex (64.2% of 2019 revenues) which provides Fortune 1000 clients with tech and creative solutions, ECS (20.3%) delivers cloud, AI, and cybersecurity technologies, and Oxford (15.4%), providing professional services and solutions to IT and science sectors.
  • ASGN receives 95% of revenue from the United States, with the remaining 5% from Canada and various countries spread throughout Europe.
  • More then half the revenues from the ECS segment are drawn from the Department of Defense and Intelligence Agencies. The acquisition of Blackstone Federal will not only enable ECS to grow over $1 billion in revenues, but will also further diverse the client base.
  • ASGN is the second largest IT staffing solution provider in the $33 billion industry.

Key points: The ECS segment provides solutions to “cloud”, cybersecurity and AI technologies and has strong relationships with the U.S. government, both Federal and State. Currently making up 20% of ASGN’s total revenue, it grew 61% in the past year. At the time ASGN was first pitched, this segment had potential to increase total revenue by 32%, which still remains prevalent. Even during the time of the Coronavirus pandemic, ECS remains strong by continually obtaining contracts from the U.S. with more to come from the government in the future.

ASGN pursues acquisitions that present opportunities to grow segments and revenues. In 2019, ASGN completed two acquisitions, Blackstone Federal and InterSys Consulting, benefitting the ECS and Apex segments accordingly. Both acquisitions were funded through cash. Management sees the Blackstone acquisition positioning the ECS segment for $1 billion in revenue growth, while increasing the EBITDA margins to the mid-teens. With InterSys contributing only in quarter four of 2019, management stated that revenues and EBITDA were close to what they projected for, with revenues being $7.6 million and adjusted EBITDA of $1.4 million, a strong start of the newly acquired addition.

We begin to see the Apex and Oxford segments provide great consulting revenues, totaling an increase of 28.7% from the previous year. The acquisition of Intersys Consulting in 2019 contributed small revenue to the Apex segment. With the expectation of Intersys being fully integrated with ASGN by Q2 2020, they are expected to add more contracts in cloud strategy and development. Apex and Intersys recently won a contract with a fast-growing fintech firm, were the cloud services provided by Intersys will prevail the dominant revenue driver. ASGN not only plans to fulfill Intersys’ clients requests, but work with them to hopefully transfer their technology platforms over to be managed by ASGN.

What has the stock done lately?
ASGN was trading roughly at $69, prior to the Coronavirus. The stock is up 15% since March 16th, suggesting a possible rebound in hopes of the virus slowing down. The ECS segment will provide revenue growth during the time of COVID-19. As of April 1st, a contract with the U.S. Navy has been signed to provide aid and support in Southern California. The ECS segment contributes 20% of revenue and is projected to increase during this time.

Past Year Performance: ASGN has decreased 41% since added to the AIM Fund in March 2019, largely due to the Coronavirus. The past year has been looking profitable, adding 3% return to the portfolio; however, with the impact of COVID-19, ASGN has lost nearly 50% of its value, and hit a 52-week low of $29.04. ASGN had a 52-week high of $72.66.

Source: FactSet

My Takeaway
ASGN has experienced a hurtful impact from the virus but remains a watch worthy company. The financial statements are attractive, as the company has high amounts of cash and not very much debt. ASGN does not pay a dividend, meaning reinvesting into the company and expanding is a priority for management. This also leads to an EPS of $3.27 in 2019. Management’s past actions proved to investors that ASGN is forward looking and constantly preparing for the future. The ability to respond to the Coronavirus quickly within the ESC segment is notable, as they are still being contracted for jobs. I recommend the AIM fund maintain this position, as it remains strong during this COVID-19 pandemic and will perform greatly when the economy is stable again.

Source: FactSet