Dun & Bradstreet Stock Has Limited Upside Despite Promising Comeback

I love big data stocks. So when I saw that an enterprise data analytics company like Dun & Bradstreet (NYSE:DNB) was set to IPO, my interest was naturally piqued.

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Indeed, the Dun & Bradstreet IPO — which happened in early July — was a big success. DNB stock debuted at $22. Shares popped to $28 a few days later. They’ve since settled back around $25. But, overall, the IPO was a great success.

Does that mean it’s time for big data investors to buy into this freshly public big data stock?

I’m unconvinced.

The story at Dun & Bradstreet is promising. This is a company that has impressively executed a huge operational turnaround over the past year, and is now ready to grow at a robust pace alongside the booming global big data analytics market.

But the valuation on DNB stock is elevated. So elevated that even if Dun & Bradstreet does grow revenues and profits by leaps and bounds over the next few years, potential upside in DNB stock will be limited.

To that end, I think the game-plan with Dun & Bradstreet is simple.

Don’t chase the IPO. Let post-IPO excitement fade a little. Buy the dip if shares tumble to $20.

Here’s a deeper look.

Dun & Bradstreet Is Back and Better Than Before

For those who know the Dun & Bradstreet name, you know that this isn’t the first time Dun & Bradstreet has been on Wall Street.

The global data analytics powerhouse was a public company for most of the 2010s. But, towards the back-half of the decade, Dun & Bradstreet turned into the wrong company in the right space. That is, while the big data analytics market continued to surge in 2016, 2017 and 2018, Dun & Bradstreet’s revenues did not.

So, in late 2018, a few private equity shops decided to take Dun & Bradstreet private and change things up. They switched out the management team. They realigned the business model. And they restructured incentives, overhauled the company’s data repository and doubled-down on improving the company’s proprietary data analysis tools.

In sum, they did everything in their power to turn Dun & Bradstreet into the global data analytics powerhouse it once was, by modernizing and simplifying the company.

The turnaround has worked wonders.

Revenues are growing again. Profit margins are expanding again. And profits are soaring again.

Specifically, in the first quarter of 2020, adjusted revenues on a pro-forma basis rose 9% year-over-year. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins rose from 25% in the first quarter of 2019, to over 33% in the first quarter of 2020. Adjusted EBITDA dollars rose nearly 50% year-over-year.

In other words, Dun & Bradstreet has successfully overhauled itself and is now ready to get back into growth mode.

Shares Are Richly Valued

Although the turnaround has been very impressive, the valuation on DNB stock reflects this reality.

Dun & Bradstreet presently commands a $10+ billion market cap. Revenues last year were $1.6 billion. Revenues grew 9% year-over-year in the first quarter of 2020. Growth should accelerate going forward on the back of rising big data market tailwinds. Adjusted EBITDA margins were 35% in 2019. Those margins should go higher, too, driven by operating efficiencies.

In other words, with DNB, you have what reasonably projects as a 10%+ revenue grower with sizable upside margin drivers, paving a realistic path for 15%+ profit growth over the next few years.

DNB stock trades at over 6-times trailing sales for that 15%+ profit.

That’s a decent combination. But not a good one.

Indeed, by my numbers, near-term upside in DNB stock is limited by this valuation friction.

My modeling suggests that Dun & Bradstreet can scale earnings per share towards $1.50 by 2030. Based on a data processing sector-average 25-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for DNB stock of approximately $25.

That’s about where shares trade today.

Bottom Line on DNB Stock

I like what Dun & Bradstreet has done over the past year. This company is now ready to power revenues and profits higher alongside the booming big data market over the next few years.

But, I don’t like it enough to pay more than 6-times sales for DNB stock.

As such, I’ll stay on the sidelines for now, and wait to buy until shares drop towards $20.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/07/dnb-stock-has-limited-upside-despite-promising-comeback/.

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