On Wednesday, Barclays (LON:BARC) has reinstated coverage on First Advantage Corporation (NASDAQ: FA), assigning an Overweight rating to the stock accompanied by a $22.00 price target. The move comes amid expectations of the company benefiting from a potential recovery in the hiring market.
The analyst highlighted First Advantage's merger with Sterling (STER) as a strategic position for growth, anticipating the combination to capitalize on any hiring rebound.
The coverage reinstatement follows observations that the hiring recession may be waning, which could signal a positive turn for First Advantage. The firm is expected to continue its outperformance through new client acquisitions, estimated at over 5%, upselling around 5%, and maintaining improved attrition rates below 4%.
Despite the optimistic outlook, the analyst also noted that First Advantage will be under close watch due to its leveraged position, high integration risks post-merger, and the expectation of only a neutral impact on earnings per share (EPS) in 2025.
First Advantage's leverage post-merger is approximately 4.4 times pro forma synergized, or around 5 times without synergies. The integration of two distinct management cultures post-merger presents risks that are being carefully considered.
However, the analyst's perspective leans toward the potential advantages, with a price target based on roughly 20 times the firm's forecasted adjusted EPS for the fiscal year 2026, discounted back to 2025 at a 10% rate.
The analyst's statement concluded with a cautious yet favorable view on First Advantage, weighing the pros and cons of the company's current situation. As the market continues to observe First Advantage's performance, the Overweight rating and $22 price target reflect Barclays' confidence in the company's strategic position and potential for growth in the near future.
In other recent news, First Advantage Corporation has been making significant strides in its business operations. The company's recent acquisition of Sterling, a $2.2 billion deal, has nearly doubled its market share and is expected to substantially boost its digital identity capabilities. This strategic move is projected to create between $50 million and $70 million in cost synergies, according to an analyst from RBC (TSX:RY) Capital Markets.
The same analyst also reinstated coverage on First Advantage with an Outperform rating, highlighting the company's "5.0 strategy" and advanced technology platforms as key growth drivers. The use of artificial intelligence, machine learning, and robotic process automation, in conjunction with First Advantage's proprietary database of over 765 million records, is anticipated to generate new customer wins and enhance cross-selling and up-selling opportunities.
In terms of financial performance, First Advantage reported steady growth in its recent earnings call, with Q3 revenues of $199.1 million. The company's 2024 guidance projects total revenues between $858 million and $918 million, with an adjusted EBITDA of $250 million to $274 million.
First Advantage's focus on reducing net leverage to around three times by the end of 2026, as well as its commitment to achieving synergy targets post-acquisition, were also emphasized in the recent developments. These strategic moves and financial results underscore the company's growth and stability amidst economic challenges.
InvestingPro Insights
To complement Barclays' analysis of First Advantage Corporation (NASDAQ: FA), recent data from InvestingPro offers additional context. The company's market capitalization stands at $3.04 billion, reflecting its significant presence in the background screening and verification services industry.
InvestingPro Tips highlight First Advantage's impressive gross profit margins, which align with the analyst's positive outlook on the company's potential for growth. The gross profit margin for the last twelve months as of Q3 2023 was 49.48%, indicating strong pricing power and efficient cost management. This robust margin could provide a buffer as the company navigates the integration challenges following its merger with Sterling.
Another relevant InvestingPro Tip notes that First Advantage's liquid assets exceed short-term obligations, suggesting financial stability during this transitional period. This liquidity position could be crucial as the company manages its post-merger leverage, which Barclays highlighted as a point of concern.
While the company's P/E ratio (adjusted) of 97.96 for the last twelve months as of Q3 2023 indicates a high earnings multiple, it's worth noting that net income is expected to grow this year, according to another InvestingPro Tip. This growth expectation may justify the premium valuation and supports Barclays' Overweight rating.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for First Advantage Corporation, providing a deeper understanding of the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.