Caldwell on reboundBlog post on Caldwell Partners by Investorfile:
Caldwell Partners on rebound and stock price should follow
TOP IDEAS: Management of Caldwell Partners International (TSX: CWL) gave the signal that revenue growth for the second half of fiscal 2024 could be significant as its executive search business begins to normalize after a rough year. Caldwell Partners International is a talent acquisition firm specializing in recruitment at all levels. The Company’s services include candidate research and sourcing through to full recruitment at the professional, executive and board levels. The Company has two distinct brands, Caldwell Partners, which provides executive search services, and IQTalent Partners, for mid-level management recruitment. Caldwell Partners International has offices across the USA, Canada and UK.
Last week, Caldwell Partners International Inc. (TSX: CWL - C$0.72) released its Q2 results for fiscal 2024. As expected, the quarterly results were not impressive. But, what was impressive is that the Company’s Q3 could be the start of a big rebound in its financial results.
From the comments in the outlook section of the Company’s Q2 MD&A report, the business operations going forward appear to be very encouraging. Management said, "Caldwell has experienced strong growth in new search bookings during the first three months of calendar 2024 and retains a strong business development pipeline.” Reading between the lines, these comments imply that, quarter-to-quarter, growth in revenues could be very significant and the recovery in its executive search business has begun. That said, in our opinion, investors can expect a dramatic upswing in financial results beginning with the Company’s next quarter, which will be reported in the middle of July 2024.
To understand the magnitude of a potential turnaround at Caldwell Partners, we need to look back first. Beginning in 2022 and into 2023, as interest rates rose rapidly, the executive search industry saw depressed hiring demand as many hiring decisions were deferred by corporations due to the uncertainly about the direction of the economy. As such, Caldwell Partners’ executive search business was in a major down-cycle, with revenue well below historical norms, averaging approximately C$17.5 million in revenue per quarter ($70 million annually) over the last 18 months. This revenue is based on an average head count of 49 revenue generating partners at the Company, which has remained relatively stable over this period.
Given that Caldwell’s Management has indicated that executive hiring demand has returned, we seek to provide some revenue quantification under a nominalized executive hiring demand environment using long-term metrics provided by the Company. Historically, the number of executive search assignments per partner per year at Caldwell averages 12. Using an average fee per assignment of $C150,000, each partner generates about C$1.8 million in revenue per year. With 49 partners, revenue from Caldwell’s executive search business amounts to about C$88 million annually. Therefore, a 25% revenue boost under normal business conditions or more can be expected in the upcoming quarters. According to a Management presentation such a revenue boost has a 30% variable margin and, as such, the Company’s target EBITDA margin is 8-10% in a normal demand market for its executive search business.
We acknowledge that the Company’s subsidiary, IQTalent Partners, which is focused on recruitment for the technology sector, as of yet has seen little recovery in its business operation. IQTalent Partners’ current revenue base is about C$11 million annually. Major cost cuts have already been implemented at IQTalent Partners to compensate for the lower revenue base, which will be fully reflected in the upcoming quarter. This should significantly curtail operating losses going forward for this subsidiary if revenue growth continues to stagnate.
Of note as a whole, Caldwell Partners International’s balance sheet continues to remain strong, with over C$7.2 million in unencumbered cash and no debt.
Ironically, today, Caldwell Partners International’s stock is trading at almost the same price as when we first recommended the Company over 10 years ago as an Investorfile Top Idea. From that time, the stock had a good run, increasing 277% in value to a high-point close price of C$2.77, while paying out $C0.565 per share in dividends. Notwithstanding that the share price has retreated significantly from its highs, over the years Caldwell Partners International has grown to be a much bigger company with a revenue base close to $C100 million on a normalized basis.
Today, Caldwell Partners International's market capitalization is only C$21.2 million, with an enterprise value of C$14 million, and the Company’s stock is trading at a deep discount to its relative size on many metrics. Because Caldwell’s Management has sent out a clear message that its executive search business is thriving again, revenues and profits should start to rebound in the upcoming quarter. Given that assumption, Investorfile is of the opinion that the stock price should rebound, too. We feel it is an excellent time for small cap investors to invest in the shares of Caldwell Partners again for a big return.
Caldwell Partners International has approximately 29.5 million shares outstanding. Insider ownership remains high with Management and Directors owning about 23% of the Company’s stock. Over the last 12 months, filing reports show that insiders have been buying the stock and no selling was reported.