FA Alpha Daily

There is a rating mismatch for this SaaS company

The SaaS industry halved in value due to macroeconomic headwinds, primarily driven by rising interest rates impacting tech companies who rely on inexpensive debt. Intelligent Solutions Holdings (CCCS) excels in property and casualty insurance, utilizing a resilient SaaS-based business model to earn a “B+” rating despite industry challenges. In today’s FA Alpha Daily, we will examine the company’s true credit risk rating through the lens of Uniform Accounting.

FA Alpha Daily:
Wednesday Credit
Powered by Valens Research

Over the past decade, the SaaS industry has enjoyed robust growth, with companies in this sector often commanding high valuation multiples. Yet, recent macroeconomic headwinds have led to a significant downturn.

Notably, the SaaS industry experienced a 53% decline in value, a stark contrast to the S&P 500’s 15% drop in the first half of 2023. This shift is largely attributed to the Federal Reserve’s policy changes, especially regarding interest rates.

The rising interest rates have particularly impacted tech companies reliant on inexpensive debt for growth.

As the cost of borrowing escalated, these companies faced challenges in managing their debt, customer acquisition, and business expansion.

This financial strain led to a spate of bankruptcies and contributed to a broader decline in the sector’s growth and profitability, putting immense pressure on subscription-based business models.

However, not all companies within the SaaS industry are equally affected.

Intelligent Solutions Holdings (CCCS), operating in the property and casualty insurance sector, emerges as a notable exception.

This company utilizes SaaS technology to streamline operations in the insurance sector, offering innovative solutions for claims processing and risk assessment.

Their focus on a niche yet critical area of the insurance market provides them with a competitive edge and a more resilient business model in the face of industry-wide challenges.

Intelligent Solutions’ strategic positioning in a vital industry segment offers a degree of insulation from the broader tech market’s volatility.

The company’s role in delivering essential services to the insurance industry translates to more consistent revenue streams and customer loyalty.

Despite these strengths, credit rating agencies often overlook the distinct nature and resilience of firms like Intelligent Solutions, applying a generalized cautious stance towards the entire SaaS sector.

That’s why, S&P gives Intelligent Solutions a “B+” rating. This rating indicates a significant risk of default, estimated at nearly 25% over the next five years. It also puts the company in the risky high-yield basket.

Considering Intelligent Solutions’ clean balance sheet, the company deserves a more secure credit rating.

We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand how the company’s obligations match against its cash and cash flows.

In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).

The CCFP chart shows that Intelligent Solutions’ cash flows are more than enough to serve all its obligations going forward.

The chart suggests that the company has a strong financial footing and should be able to meet its obligations without difficulty over the next five years.

Intelligent Solutions has no debt obligations coming due going forward, which is a significant positive factor that distinguishes Intelligent Solutions from an average SaaS business.

Moreover, with its substantial cash reserves and solid cash flow, the company is well-equipped to manage any economic challenges that might arise.

Our analysis of Intelligent Solutions’ financial statements leads us to believe that the company’s risk of default is quite low, which stands in contrast to the more conservative evaluations of rating agencies.

As a result, we are assigning an “IG4” rating to the company. This rating places the company in the investment-grade basket, indicating a risk of default of about 2%.

It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.

To see Credit Cash Flow Prime ratings for thousands of companies, click here to learn more about the various subscription options now available for the full Valens Database.

SUMMARY and Intelligent Solutions Holdings (CCCS:USA) Tearsheet

As the Uniform Accounting tearsheet for Intelligent Solutions Holdings (CCCS:USA) highlights, the Uniform P/E trades at 32.3x, which is above the global corporate average of 18.4x but below its historical P/E of 44.8x.

High P/Es require high EPS growth to sustain them. In the case of Intelligent Solutions, the company has recently shown a 848% Uniform EPS shrinkage.

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, Intelligent Solutions’ Wall Street analyst-driven forecast is for a -62% and 215% 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 Intelligent Solutions’ $11 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company’s earning power in 2022 was 4x the long-run corporate average. Moreover, cash flows and cash on hand are 3x its total obligations—including debt maturities and capex maintenance.

Overall, this signals a low operating risk.

Lastly, Intelligent Solutions’ Uniform earnings growth is below its peer averages and is trading in line with its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

This analysis of Intelligent Solutions Holding’s (CCCS) credit outlook is the same type of analysis that powers our macro research detailed in the member-exclusive FA Alpha Pulse.

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