We came across a bullish thesis on First Advantage Corp (FA) on ValueInvestorsClub by felton2. In this article, we will summarize the bulls’ thesis on FA. FA’s stock was trading at $17 when this thesis was published, vs. a closing price of $19.28 on November 28.
FA is a leading provider of employment background screenings and identity and verification services. From the criminal record checks that FA offers as part of its service portfolio, the company achieved 100 million screens in 2023 for 30,000 clients. Their orientation towards enterprise customers, especially in transportation (24%) and Retail/e-commerce (22%), and a high 97% gross renewal rate proves their market leadership. A significant competitive advantage is their own database called Verified!, which can be used in their services.
Moreover, background screening is linked with employment and turnover, as FA’s revenue is connected to JOLTS private hires and quits. Despite the continuous year-over-year (YoY) decline in hires and quits in the eight consecutive quarters, current data suggest that the labor market may be close to bottoming out. This cyclic structure gives a good backdrop for FA’s growth strategies.
Additionally, FA’s purchase of Sterling (STER), the second-largest participant in this market, not only doubles FA’s size but also expands the customer spectrum and improves the product line. The management’s urge to complete the deal by 2024 means that synergies of about $50 million might be on the low side, given that the two firms have $1.5 billion in revenues combined.
Furthermore, the implementation of FA stringent operational management could drive more enhanced margins, considering STER is trailing at approximately 500bps in EBITDA margin.
As for the valuation, although FA initially has a higher leverage of 4.5x post-merger, it will gradually decrease to 2 to 3x by 2026 or 2027. While there are cyclical issues, the fact that the company can generate free cash flow (FCF) makes it relatively solid in the short term and has good growth prospects in the long term. Also, the market seems to have undervalued the possible synergies, increase in scale, and cross-selling prospects, all of which sweeten FA’s positioning.
Despite that, some risks may include breaches of regulations such as Antitrust, macroeconomic factors, and changes in employee turnover after the merger. However, the strength of FA in terms of execution history and a highly effective competitive barrier means that it is ready to seize the opportunity in its field. For investors, FA’s growth strategy appears quite attractive at this cyclical stage.
While we acknowledge the potential of FA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than FA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: Stavros Tousios has no positions in the aforementioned stocks.
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