On Thursday, KeyBanc made an adjustment to the stock price target for Alight Solutions (NYSE:ALIT), reducing it to $11.00 from the previous $12.00. Despite the decrease, the firm maintains an Overweight rating on the company's shares. The adjustment follows a significant drop in Alight's stock price, which fell 16% on the day, compared to a marginal 0.2% decline in the NASDAQ.
The lowered stock price target comes after Alight Solutions reported a top-line miss, attributed largely to a weaker project-based business that the company is in the process of divesting. KeyBanc views the stock's sharp decline as a promising opportunity for investors, considering the company's strategy to concentrate on higher-margin, recurring revenue streams following the sale.
Alight Solutions has announced that it will provide updated FY24 guidance after the completion of the divestiture. The company expects revenue to be under pressure in the second quarter but projects a ramp-up in the second half of the year due to last year's bookings. Despite the short-term guidance revision, Alight maintains a medium-term outlook of 4-6% growth.
KeyBanc anticipates that Alight Solutions will experience growth and margin expansion in the latter part of the year, especially in terms of margins once the divestiture is finalized and pro forma numbers are available. The firm acknowledges the complexity of Alight's situation this year but reiterates its positive stance on the stock.
The new stock price target of $11 implies a modest valuation of approximately 10.0 times KeyBanc's projected pro forma FY25 adjusted EBITDA of $789 million, which corresponds to roughly 26% margins.
KeyBanc holds the view that Alight Solutions is significantly undervalued, trading at about 8.0 times the next twelve months' adjusted EBITDA, especially considering its post-divestiture revenue composition of over 90% recurring revenue, with mid-20% margin profile and annual expansion, along with improving cash generation.
InvestingPro Insights
Alight Solutions (NYSE:ALIT) has been navigating choppy financial waters recently, as reflected in the real-time metrics from InvestingPro. With a market capitalization of $4.42 billion and a negative price-to-earnings (P/E) ratio of -12.10, investors are closely watching the company's performance.
The adjusted P/E ratio for the last twelve months as of Q1 2024 stands at -15.56, indicating market skepticism about future earnings. However, the company's revenue growth of 4.48% in the same period suggests some positive momentum.
InvestingPro Tips highlight that net income is expected to grow this year, a sign that the company may be turning a corner. Notably, Alight's liquid assets exceed its short-term obligations, providing some financial flexibility.
On the flip side, four analysts have revised their earnings downwards for the upcoming period, which may be cause for concern among investors. Despite this, the stock's current oversold status according to the RSI could potentially signal a buying opportunity for those looking at the longer-term horizon.
For investors seeking a comprehensive analysis, there are additional InvestingPro Tips available, which can be accessed by visiting: https://www.investing.com/pro/ALIT. To enhance your investing strategy with these insights, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With a total of 11 InvestingPro Tips listed, including those not mentioned here, Alight Solutions investors have a wealth of data at their fingertips to inform their decisions.
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