TriNet Is Growing In An Underserved Market

TriNet Is Growing In An Underserved Market

TriNet (NYSE:TNET) provides a variety of different services for small and mid-sized businesses (SMBs), basically acting as an HR services company. Streams include health insurance and workers’ compensation programs, payroll, employee data, and compliance consulting. The company’s stock has doubled since the stock market tanked in March.

We believe that the company is fairly valued at the moment and has long-term potential to grow given that the majority of the SMB market is currently not being served. Being a market leader, TriNet can leverage its brand and variety of offerings to help businesses become more efficient while focusing on their own long-term goals. Moreover, despite the coronavirus outbreak, TriNet has helped SMBs by offering tailored resources and information related to COVID-19, which signifies that the company can adapt as a service provider under any circumstances.

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(Google TriNet Market Chart, 2020)

TriNet has seen consistent growth over the past few years

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(TriNet Quarterly Presentation, 2020)

Before the coronavirus and during the fiscal years of 2016-2019, TriNet saw a 13% CAGR in terms of organic net service revenues, which can be attributed to the consistent growth of both its main segments. Revenue growth has complemented increased EPS figures, which has gone from $0.85 in FY2016 to $2.99 in FY2019.

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(TriNet Quarterly Presentation, 2020)

With one quarter left in FY2020, TriNet has reported projected growth in every major category despite the coronavirus, most notable is the projected 23% gain in the GAAP EPS figure. The net service revenues growth rate of 6% is a bit lower compared to previous years, but we believe that as more SMBs recover from the pandemic, TriNet should be one of the first companies to benefit.

Currently, YTD 2020 figures are very impressive, as the company’s operating income figure of $338M is a 65% increase compared to the same period last year. Net income of $250M is up 52%.

TriNet’s financial position sets it up for more acquisitions

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(TriNet 10-Q, 2020)

TriNet currently incorporates assets and liabilities related to client ‘Worksite employees’ in its financial statements. We believe that it is more important to look at the ‘Corporate’ figures despite risks related to insurance. The company has $563M in cash compared to $352M of total corporate liabilities, which will be prioritized into 3 different categories.

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We believe that the next few quarters give the opportunity to TriNet to potentially acquire technologies that significantly improve its product offering either vertically or horizontally, especially if the acquired company is in financial distress. TriNet wants to cater to SMBs in all types of industries, and the company recently acquired Little Bird HR, which is a private firm based on the East Coast of the United States that is focused on the education industry. The company has acquired a total of 5 companies within about a decade, 3 of which have been integrated into its technology platform.

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(TriNet Quarterly Presentation, 2020)

Looking at the long-term horizon, we acknowledge that TriNet does have $353M in long-term debt. However, interest expense does not have a material effect on net income, and we do not expect margins to change a noticeable amount for the foreseeable future.

TriNet ultimately serves a market that has room to grow

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(TriNet Quarterly Presentation, 2020)

We believe that a big reason why lots of SMBs do not currently use PEOs (Personal Employer Organizations) like TriNet is that a large chunk of the services that PEOs provide are not flexible. TriNet understands that different industries are looking for tailored solutions, and SMB owners want to work with PEOs that have an understanding of the big picture.

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(TriNet Quarterly Presentation, 2020)

By continuing the expansion of its vertical offerings, TriNet creates a competitive advantage within that specific industry, which in turn increases the total serviceable obtainable market.

TriNet solves defined problems that SMBs face, and these issues are not disappearing anytime soon. SMBs must comply with tons of different regulations at all local and federal levels and are subject to hefty fines if the rules are not adhered to. We believe that the COVID-19 pandemic has amplified this situation, especially as more companies operate out of different jurisdictions given the increase of remote work. It may be harder to manage operational and insurance solutions virtually, especially because SMBs would usually pay multiple vendors and employees for such services (TriNet Quarterly Presentation, 2020). Therefore, TriNet could acquire new businesses because of its diversified portfolio of service offerings.

TriNet faces company-specific and industry-wide risks

The financial performances of SMBs are much more volatile compared to mature and large companies. Therefore, TriNet’s ability to retain and gain new business is largely dependent on the macroeconomic environment. Moreover, insurance claims associated with TriNet’s clients’ employees could increase costs for the company, which in turn could have a material effect on the business. TriNet’s insurance business could also be affected if suppliers decide to change options and insurance rates. TriNet also faces unpredictable demand and potential termination of services from its clients, which is independent of TriNet’s business performance.

In summation, we believe that TriNet’s position as a leader in an underserved market presents opportunity to make key strategic acquisitions while diving into new serviceable industries. We remain optimistic about the company’s long-term growth and believe the stock is fairly valued, as the stock’s P/E ratio is 17.2x and its P/S ratio is 1.29x.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Credit: SeekingAlpha

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