Advantage Solutions: Stock Undervalued; Solid Fundamentals

Advantage Solutions Inc. (NASDAQ:ADV), a sales and marketing company, has accumulated data thanks to long-term relationships with brands over years and has recurrent revenue. I believe that ADV’s one-to-one engagement strategies and future successful analysis of shopper behavior will likely bring free cash flow generation. Also, taking into account risks from data regulators and lack of technological advantages, in my view, ADV appears cheap at its current market price.

Advantage Solutions

With active operations in 40 countries, Advantage Solutions offers its clients different types of solutions for brand and business growth. Its business model is divided into two segments, marketing and sales.

Advantage Solutions presents itself as a trusted link between its clients and their buyers, whatever way of buying they use. To do this, it offers a strong competitiveness and sales platform along with digital or central store sales in addition to marketing services to increase visibility and consumption of certain products. More than 72k associates and over 400 data analytics professionals work with the organization.

In my view, the most appealing about Advantage Solutions is the fact that many large brands out there are long-term clients, bringing recurring revenue streams. We are talking about long-term relationships of more than 11 years. In terms of revenue visibility and free cash flow generation, having such type of long-term relationships appears quite beneficial.

Market Expectations Include A Median Of 8.26% Net Sales Growth And A Median EBITDA Margin Of 10.49%

For 2024, analysts forecasted a net sales of $4.293 billion with a net sales growth of 1.80%, in addition to an EBITDA of $421 million together with an EBITDA margin of 9.81%. The operating profit would be $295 million, presenting an operating margin of 6.88%. The net income will likely be $132 million. In addition, 2023 free cash flow would be $224 million.

Balance Sheet

As of September 30, 2022, Advantage Solutions reported cash worth $96.215 million, in addition to accounts receivable worth $833.432 million and the prepaid expenses of $155.429 million. Total current assets stand at $1.1 billion, close to two times the total amount of current liabilities. In sum, Advantage Solutions appears to have a liquid position.

Goodwill was $2.24 billion with other intangible assets of $2.15 billion, investments of $124.815 million, and other assets close to $120.644 million. Finally, total assets stand at $5.81 billion, close to 1x-2x the total amount of liabilities.

The liabilities include accounts payable worth $267.684 million, accrued compensation of $109.935 million, and other accrued expenses of $161.246 million. Total current liabilities stand at $601 million with long-term debt worth $2.024 billion, deferred income tax liabilities of $456.755 million, and total liabilities of $3.19 billion.

One-To-One Engagement Strategies And Further Successful Analysis Of Shopper Behavior Could Imply A Valuation Of $4.04 Per Share

Advantage Solutions’ sales segment works mainly with traditional retail channels in the field of food and digital commerce. These services are offered to brands of different sizes and are completed with a meticulous job of data analysis as well as the management and administration of the trade of its products. Similar forms of performance are present in its retail sales segment, mainly working from digital stores and different types of multimedia platforms to offer products to the market. In this regard, I believe that the company’s one-to-one engagement strategies appear promising. Under this case scenario, I assumed that the company’s know-how, in-store experience, and loyalty programs will bring FCF generation.

We design and execute one-to-one engagement strategies in order to drive product trial and sales and help retailers differentiate their in-store experience and generate more loyalty from shoppers. This includes in-store sampling and demo programs with fully-scaled operations including staffing, training, field management, assembly, fulfillment, technology and reporting. We deploy teams at each retailer that develop event concepts in conjunction with marketing, merchandising and store operations and then secure supplier support and funding for the programs. Source: 10-K

I also believe that Advantage Solutions’ work with manufacturer clients, further analysis of shopper behavior, and accumulation of data about specific industries will be helpful. The company gave the following explanation about the services offered to such types of clients.

For manufacturer clients, we analyze shopper behavior and apply our deep retailer knowledge and expertise to offer planning, execution and measurement of insight-based, retailer-specific promotions that target a retailer’s specific shopper base to drive product sales. Source: 10-K

My expectations for 2032 include net sales of $7.375 million and a net sales growth of 8%. 2032 EBITDA would stand at $715 million together with an EBITDA margin of 9.70%. 2032 free cash flow will likely be close to $450 million with an FCF margin of 6.10%.

If we assume a WACC of 8.4% and the mentioned FCF, the net present value stands at close to $1.773 billion. Now, with an EV/EBITDA multiple of $4.9x, the terminal value would be close to $3.505 billion with the NPV of TV of $1.443 million.

Finally, the implied enterprise value would be $3.216 billion, which, with a cash of $114 million, debt of $14 million, and long-term debt of $2.024 billion, implied an equity of $1.2 billion. The fair price would be close to $4.04 per share, and the internal rate of return would be 11.19%.

More Competition, Lack Of Technological Innovations, And Price Negotiations With Clients Could Bring Fair Price Down To $1.2 Per Share

Advantage Solutions’ competitors are generally smaller companies with a regional reach as well as some large national and international marketing agencies. Although the company has not given further statements in this regard, we can add that innovation in its strategies and the success of these in relation to the needs of its clients are essential to avoid the risk of losing contracts.

It appears true that the field of marketing, especially digital marketing, is a field of high competition that year after year changes in its details and business strategies. The correct reading and updating of these strategies towards the future play a fundamental role in what concerns the possible risks in the development of the business model of the company. Under this case, I assumed that Advantage Solutions would fail to offer sufficient innovative strategies, which may lower future revenue growth and FCF margin.

In the same way and in addition to the logical market variations and the current moment of global economic instability, we can add that government regulations, mainly with regards to its marketing segment and the areas of consumer data analysis, and the little diversification that the company currently has in its client portfolio may be detrimental. The suspension of activities as well as a decline in corporate relations with some of these clients could negatively affect the CFO and the business model of the company.

Advantage Solutions may also suffer from clients looking to reduce their costs. They may try to negotiate prices with Advantage Solutions, which would lower the company’s FCF margins, and may affect the company’s fair valuation. In the last annual report, the company gave some information in this regard.

Many of our clients seek opportunities to reduce their costs through procurement strategies that reduce fees paid to third-party service providers. As a result, certain of our clients have sought, and may continue to seek, more aggressive terms from us, including with respect to pricing and payment terms. Such activities put operational and financial pressure on our business, which could limit the amounts we earn or delay the timing of our cash receipts. Such activities may also cause disputes with our clients or negatively impact our relationships or financial results. Source: 10-K

Under the previous conditions, 2032 net sales would stand at $5.523 million, with net sales growth of 3.2%. I also included 2032 EBITDA of $536 million and an EBITDA margin of 9.70%. 2032 free cash flow would stand at $337 million, and the FCF margin would be 6.10%.

If we assume a WACC of 10.5% and use the FCF from 2022 to 2032, the net present value would stand at $1.432 billion. Besides, assuming an EV/EBITDA multiple of 5x, terminal value would be $2.625 billion, and the net present value would stand at $875 million.

In sum, my DCF model obtained an implied enterprise value of $2.308 billion, equity of $384 million, and a fair price of $1.20 per share. Finally, the internal rate of return would be close to -3.7%.

Conclusion

With a lot of access to data of shoppers and long-term relationships with large brands, Advantage Solutions will likely experience business growth. In my view, further successful development of one-to-one engagement strategies and analysis of shopper behavior for manufacturers could bring significant free cash flow generation. Even taking into consideration potential risks from new data regulations or unsuccessful technological innovation, the company appears clearly undervalued by the market.