Teleperformance Stock: Why I Believe In An Inevitable Upside (OTCMKTS:TLPFF)

Dear reader/followers,

I have been a proponent of Teleperformance (OTCPK:TLPFY) (OTCPK:TLPFF) for a bit over a year now, and while I initially in some cases went in too early into this investment, I continue to say that Teleperformance is one of the better investment potentials out there, with a triple-digit upside. Triple-digit upsides need to be qualified, and I have done so in previous articles.

The company has been through a number of “scares” in the last few months, leading to a significant reduction in the company’s share price, which for some time has troughed below the €100/share mark for the native ticker.

Did this worry me? Not in the least – because I have analyzed this company at a deep level, I view this as a complete overreaction, and we have seen the company slowly recover already, up above €110/share. Because I took advantage of the low cost and reduced my cost basis to around €99/share, I am up quite nicely as well.

The real magic, however, happens when we based on that cost basis estimate that this company could easily reach over €200-€250/share, and what sort of returns this would mean.

Why do I think that this is possible?

Let me show you.

Teleperformance – The valuation continues to be attractive – because the company continues to grow

With the inclusion of the Majorel M&A, Teleperformance has become one of the best-outsourced service companies available. This is not an easy or light statement to make, and I am obviously prepared to back this up.

With Majorel included, Teleperformance is expected at this time, based on 17 analyst forecasts, to generate an adjusted EPS of €15.15 for the 2024E fiscal.

We have 1Q24 as of early May, and for this period, the company reported growth as expected at a 26.7% increase YoY. (Paywalled F.A.S.T graphs Link) Pro forma, the company is completely on track to reach its 2024E objective. This is an important fact, very important. Because with the integration of Majorel on track – and it is – and the confirmation of synergies worth €150M by 2025, and continued cash generation to shareholders, I see very little that could or would derail this company. The market obviously sees this differently – and we’ll get into that. But those are, as I see it, “fears”. Here are the facts.

And, dear readers, I love when facts do not change the mind of the market – because that is when I am able to make some very great deals indeed. One of the fact-based worries for Majorel is an ongoing growth decline in the company – but this growth decline seems to have troughed, with a 2024E outlook of 2-4% revenue growth this year.

Growth so far has been driven by specialized services, as well as geographical activities in the regions of APAC and India.

The company remains extremely well-diversified in terms of company verticals and also as I would say, geography.

The only conceivable sort of risk that I would say I can sort of agree with is Teleperformance’s exposure to the customer care subsegment, which saw a 54% exposure for Q1 – but this is not something that I view as worrying as the market seems to view it as this time. Also, because the company does not change its 2024E outlook, Teleperformance has a superb “batting average” , hitting targets more than 80% of the time with a positive margin of error or an MoA of 20% on a 2-year basis.

Not only that, if you think that 1Q24 or 1H24 is going to be good – the company expects 2H24 to be even better.

However, let’s spend some time to answer one of the pressing questions investors in Teleperformance seem to have at this time.

Namely, is generative AI a threat to Teleperformance?

To which I would respond, no it’s actually an enabler, a way for the company to grow its services.

First of all, iterations of GenAI are not a major automation factor for Teleperformance. GenAi which automates simple transactional or informational interactions is operating on what is known as a vector-embedding sort of technology that is almost a decade old in its introduction. A vast majority of such interactions today are already addressed by so-called “bots”, and thus do not present a replacement threat for Teleperformance.

Instead, the main advantage for Teleperformance lies in augmentation and Activation, which means that Teleperformance can service otherwise high-cost languages in English instead, through things like StoryfAi.

And, dear readers and investors, Teleperformance is already doing this.

Therefore, to say that this is in any way a “threat” to the company is to ignore the entirely valid point that Teleperformance is already integrating and using this. Secondly, and this is more advanced, is the core deflationist from a topline perspective a threat to the company’s survival? To which I would say that the company’s operations are mainly found in inflationary markets which represent more than 80% of company revenues, with a lower rise in company production prices on a per-hour basis. The company can even enhance this further by moving offshore and including both AI and GenAi in its operation.

There is proof of this, at this particular period, through growing EBIT, margins and net benefits as well as average company price increases for these areas.

Also, there’s the rather simple fact that Teleperformance clients need superior quality services at the best possible price. it does not need to be expansively explained that at its current state, a mix of genAI and human interaction is a requirement for this, which means that Teleperformance is in a superb position to do exactly this. It has a unique position, especially after Majorel, as a global and multilingual leader with a very strong footprint, and a good integration of automation of services.

Here is the basis for the company’s positive future, and while it is one that is summarized by the company itself, it is one that I consider to be perfectly valid.

Teleperformance has a 10-year history of double-digit CAGR revenue growth – and I believe it’s about to go another 10-year tear with the same sort of basis – and this includes AI, no matter what the fear in the market currently says.

And because of this, I am very positive about this company’s future and would consider my current thesis for the company not only intact but even better than before.

Let’s look at the valuation and upside.

Teleperformance Upside from valuation – it has strong potential here.

My thesis for Teleperformance continues to be on the simple side. By this I mean it is an outperformer that’s being undervalued, and I see no reason not to invest further as long as I am not at full valuation. It really does not matter if you estimate the company a 15x P/E or the normalized long-term P/E of 19-20x. The upside is there nonetheless.

Here is the long-term 20-year P/E upside to 19x.

The upside to a P/E of 14.9x is around 45% annualized, at a total potential TSR of 166%.

What if your argument is that the company is only worth 8x?

Then, by all means, forecast it there. Based on current growth estimates, which based on historicals have a high likelihood of being true, the company is still going to be outperforming the market at 8.3x, based on almost 18% annualized.

This is one of those situations where I only see “win” scenarios unless we see an absolutely catastrophic sort of decline or “breakage” of the company – and I view such a likelihood as very remote.

Because of this, I continue to believe in the tenets of valuation-based investing, and this makes Teleperformance an absolutely no-nonsense “BUY” to me here.

Rotating or selling the company here is something I would do when the conservatively adjusted forward annualized RoR dips below 12-14%. That would be the case above €290 as things stand currently, and even then it’s always a question of what I am selling and what I am getting for what I am selling. A rotation is never just that, you also need to consider what you’re replacing it with. I say this because some investors are now already sitting on fairly good gains, and might ask themselves about the right time to rotate. This is always a personal choice, but I am not rotating here. There are a few reasons for this, but one of them is also that I am already extremely cash-heavy at over 12%.

Even in today’s environment, and even while holding over 12% cash as I do today, I try to minimize my cash position as much as I can possibly justify this given the historical implications of not being invested in the market (especially at my age of below 40 years.)

Analysts aside from me consider Teleperformance to be a “BUY”, though their targets are far below mine. We’re talking a €97 low to a €215 high (I’d love to see the assumptions for that €97/share thesis), and out of 17 analysts, 14 are at either a “BUY” or “Outperform” rating.

Therefore, any conviction you see here is strong, and I do not believe that I am exaggerating when I say that I view Teleperformance as one of the very strongest potentials in this sector, or this geography, for the next 5 or so years.

My thesis, updated for 1Q, is therefore as follows.

Thesis

• Teleperformance is a superb company in the call center and general business service outsourcing field. I consider the company to be one of the finest around, and due to a combination of fundamental strength and excellent upside, to be a “BUY” here.

• The “BUY” is stated based on a conservative target share price of €275/share – and by giving it that target, I’m 10-20% lower than the average analyst, due to my always discounting conservatively. However, I believe this company has the very real potential to outperform.

• For that reason, I recently bought shares, and I wish I could buy more at this time. My cost basis is now down to below €100/share for the native, and I consider this position likely to double or triple within a few years.

Remember, I’m all about:

• Buying undervalued – even if that undervaluation is slight and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

• If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

• If the company doesn’t go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.

• I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.

• This company is fundamentally safe/conservative & well-run.

• This company pays a well-covered dividend.

• This company is currently cheap.

• This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.

Not only do I believe Teleperformance to be at a great valuation, I also believe the company to have a very considerable upside, and therefore consider it to be a “BUY” here.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.