VioletaStoimenova
Shares of HireRight (NYSE:HRT) have done quite alright for an IPO name which went public last year, as shares have been trading largely flattish in its first year after going public. This is quite an achievement given the performance of the market and certainly IPO names over this period of time.
In November of last year I concluded that the prospects for this IPO looked alright amidst a solid performance of the underlying business, with appeal improving amidst a non-demanding price.
Hiring The Right People For The Right Opportunity
HireRight offers employment screening solutions to help employers to hire the right people for the right opportunity. The company offers a global technology platform which offer screening services in more than 200 countries. The company performed some 80 million screens in 2020 for more than 40,000 organizations, as organizations use these solutions to screen applicants, current employees and contractors.
It is not just about hiring the right people, services are used for KYC purposes, safety and security, and compliance. Checks involve criminal record checks, identity services, education credentials etc. Founded in 1990, way ahead of the technology boom in recent years, the company has seen a big boost following a combination of its operations with General Information Systems in 2018.
The company went public at $19 per share, quite a bit below the preliminary offering price set between $21 and $24 per share. 79 million shares valued equity of the business at $1.5 billion at the offer price, as a $600 million pro forma net debt load translated into a $2.1 billion enterprise valuation.
To put this valuation into perspective we had to look at the recent performance. 2019 revenues came in at $647 million on which a $40 million operating profit was reported, with earnings partially held back by amortization charges incurred with the GIS deal. With the pandemic resulting in a rapid decline in hiring and background checks, revenues fell 17% to $540 million that year as a $12 million operating loss (on GAAP accounting) was reported.
2021 marked the start of a very strong recovery. Revenues were up 25% in the first half of the year to $326 million, for a $650 million run rate, set to surpass the 2019 results. Moreover, a $23 million GAAP operating profit resulted in a run rate of annual profitability of $46 million, again exceeding the 2019 numbers. That was still likely an understatement as second quarter revenues came in at a run rate of $700 million already with operating earnings trending at $70 million. Adding some $60 million in amortization charges back to this number, realistic operating earnings totaled $130 million already.
Momentum was confirmed with the preliminary third quarter results, issued at the time of the IPO, with revenues seen above $200 million and GAAP operating profits seen at $30 million. Amidst all this, I pegged a realistic net earnings run rate at $120 million, or $1.50 per share, which looked quite compelling despite a 3-time leverage ratio, certainly as shares traded at $17 on the first days of trading in strong market conditions.
Share Price Stagnation – Solid Operational Performance
Despite my upbeat tone last year, shares have been trading in an $11-$18 range ever since, currently exchanging hands at $15 per share. In March of this year, the company posted its 2021 results with fourth quarter revenues up 32% to $198 million, as GAAP operating profits were stuck around $7 million.
The company grew total revenues for the year from $540 million to $730 million, as GAAP operating profits were posted at $57 million. It was clear that most of the peak profitability had already ended, as I feared that a great hiring boom following the pandemic was a thing of the past already.
2022 revenues were seen growing further to $805-$820 million, with EBITDA seen at a midpoint of $185 million and adjusted net income at a midpoint of $110 million, for earnings between $1.32 and $1.45 per share. Fortunately, the adjustment made for stock-based compensation was relatively limited.
Following a solid first quarter, the company hiked the full year guidance, as it hiked the guidance further in August alongside the second quarter earnings release. Full year revenues are now seen at a midpoint of $825 million, but more important, margins are expected to rise in a rather spectacular fashion. Adjusted earnings are now seen at a midpoint of $135 million, with EBITDA approaching the $200 million mark. Earnings are now seen around $1.70 per share as net debt has gradually been coming down to $575 million.
That is a bit too simplistic as some stock-based compensation expenses will be incurred following becoming a public company. Second quarter stock-based compensation expenses of $4.5 million run at $18 million per year here, or just over $0.20 per share. This makes a $1.50 per share earnings number realistic. This coincidentally matches the calculation a year ago, as valuations are non-demanding at 10 times earnings here.
What Now?
I must say that the company has been doing quite alright from an operational point of view in its first year of existence as a publicly traded business, yet it has been held back by very weak market conditions. Right now valuations are non-demanding at 10 times, as unfortunately leverage is stuck around 3 times with money spent on modest debt reduction and handling of interest rate swaps, among others.
If the company can maintain this momentum, there is room for valuation multiple expansion, even as the market at large has seen multiples compress over the past year, making me still quite upbeat as this checking services checks a lot of my boxes here, even if labor markets might slow down a bit if and once the economy cools down.
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