FA Alpha Daily

Finding profits offshore with this upcoming AI business

The growing adoption of AI and machine learning positions companies like CI&T in a favorable spot. CI&T offers proprietary in-house software solutions to assist clients with digital transformation initiatives. In today’s FA Alpha Daily, we will discuss market’s embedded expectations for CI&T and determine what sets it apart.

FA Alpha Daily:
Thursday Uniform Accounting Analysis
Powered by Valens Research

It is risky to delve into the unknown, and even riskier to invest in it.

As investors, we want our bets to be as safe as possible and the outcome to be certain. This makes us skeptical about placing capital on businesses and markets we do not completely understand. Especially foreign ones…

That’s why we are talking about CI&T (CINT) today. A great business that is flying under the market’s radar because it’s from Brazil.

CI&T develops proprietary software solutions in-house to help its clients with digital transformation initiatives.

The company partners with some of the world’s biggest valuable brands to build AI-powered digital solutions. Some of the partners’ of CI&T are Google (GOOGL), Johnson & Johnson (JNJ), and Nestle (SWX:NESN).

This Brazilian software engineering company is carving out a remarkable niche for itself by dedicating its expertise to cutting-edge fields like machine learning and AI.

And great things about CI&T don’t end here…

What truly sets this company apart is its unique consulting approach. Instead of simply selling software licenses, they engage in a collaborative partnership with their clients.

This approach involves understanding the specific needs and challenges of each client, tailoring solutions to their requirements, and providing ongoing support and guidance. By doing so, they create lasting relationships and deliver software that is finely tuned to maximize value for their clients.

With the adoption of AI and machine learning systems, and the company’s expertise in these fields, the number of multi-million-dollar accounts has been growing. Looking at the pace of innovation in the field, this growth is likely to continue.

However, it’s worth noting that the market’s evaluation of this growth appears to be somewhat conservative, as it fails to fully acknowledge the company’s potential.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s Uniform return on assets (“ROA”) to fall around 14%, the lowest since the IPO.

The market’s pessimistic view is caused by not completely understanding CI&T’s potential.

The company’s strategic focus on AI and machine learning positions it on the cusp of a technological revolution.

As these fields continue to grow and mature, the company is poised to reap significant returns.

SUMMARY and CI&T Inc. Tearsheet

As the Uniform Accounting tearsheet for CI&T Inc. (CINT:USA) highlights, the Uniform P/E trades at 20.5x, which is above its global corporate average of 18.4x but around its historical P/E of 21.2x.

High P/Es require high EPS growth to sustain them. In the case of CI&T, the company has recently shown a 14% shrinkage in Uniform EPS.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, CI&T’s Wall Street analyst-driven forecast is a 28% and 5% EPS growth in 2023 and 2024, respectively.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify CI&T’s $5.60 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to grow 9% annually over the next three years. What Wall Street analysts expect for CI&T’s earnings growth is above what the current stock market valuation requires in 2023 but below its 2024 requirement.

Furthermore, the company’s earning power is 5x its long-run corporate average. Moreover, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends.

All in all, this signals low credit risk with no dividends.

Lastly, CI&T’s Uniform earnings growth is in line with its peer averages and its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

The Uniform Accounting insights in today’s issue are the same ones that power some of our best stock picks and macro research, which can be found in our FA Alpha Daily newsletters.

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