Rating Update: Stock Rating C-Neutral (11/4/19)-RingCentral Inc (RNG).

out_logo_500#71181.jpg

BUSINESS

RingCentral, Inc. provides software-as-a-service solutions for business communications and collaboration primarily in the United States. The company’s products include RingCentral Office, a multi-tenant, multi-location, and enterprise-grade communications and collaboration solution that enables employees to communicate through voice, text, team messaging and collaboration, and HD video and Web conferencing through smartphones, tablets, PCs, and desk phones for businesses, which require a communications solution; RingCentral Professional, an inbound call routing subscription with additional text and fax capabilities primarily for smaller businesses; and RingCentral Fax solution that offers Internet fax capabilities, which allow businesses to send and receive fax documents without the need for a fax machine.
out_plist#71181.jpg

INVESTMENT RATING

out_map1#71181.jpg

RNG is expected to continue to be an important Value Builder reflecting capital returns that are forecasted to exceed the cost of capital.

RingCentral has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. RingCentral has a very low Appreciation Score of 3 but a very high Power Rating of 98, triggering the Neutral Value Trend Rating.

RingCentral’s stock is selling significantly above targeted value. The current stock price of $157.65 compares to targeted value 12 months forward of $27.
RingCentral’s very low appreciation potential results in an appreciation score of 3 (97% of the universe has greater appreciation potential.)
out_pt#71181.jpg

RingCentral has a Power Rating of 98. (This very high Power Rating indicates that RNG has a higher likelihood of achieving attractive investment performance over the near to intermediate term than all but 2% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been extremely favorable; the recent trend in RNG’s earnings estimates has been favorable; and is currently in a modestly favorable positi.

INVESTMENT PROFILE

RNG’s financial strength is average. Financial strength rating is 49.
out_pfit1#71181.jpg

Relative to the S&P 500 Composite, RingCentral Inc has slightly more Growth than Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that RNG is higher risk. High expected growth is a positive for RNG. Relative weaknesses include: low historical profitability, low financial strength, and low historical growth. RNG’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. RNG has unusually low market capitalization.

CURRENT SIGNALS

RingCentral’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

RingCentral’s current technical position is very strong. The stock price is in a 9.8 month up move. The stock has appreciated 142.5% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

In light of this new information we are reviewing our current Overall Rating of C. This review will be completed in the next several days.
RingCentral Inc (NYSE: RNG) has reported E.P.S. of $-0.15 for its third fiscal quarter (ending September 30) versus $-0.12 for the same period a year ago. This performance was $-0.34 short of the consensus estimate of $0.19. E.P.S. were $-0.41 for the latest four quarters through September 30 versus $-0.26 for the same period a year ago.
On 11/4/19, RingCentral Inc (NYSE: RNG) stock enjoyed a major increase of 60.0%, closing at $0.02. Moreover, unusually high trading volume at 158% of normal accompanied the advance. The stock has been exceptionally strong relative to the market over the last nine months but has declined -1.7% during the last week.

CASH FLOW

In 2018, RingCentral generated a very significant increase in cash of +$385.14 million (+213%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$9.56 million. Non-operating sources contributed +$3.75 million (+39% of EBITDA). Cash taxes consumed -$0.14 million (-1% of EBITDA). Re-investment in the business amounted to -$150.10 million (-1571% of EBITDA). On a net basis, debt investors supplied +$350.45 million (+3667% of EBITDA) while equity investors supplied +$171.61 million (+1796% of EBITDA).
out_cflow.1#71181.jpg

RingCentral’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Ringcentral Inc Peer Group. In most years, RingCentral was in the top quartile and second quartile. Currently, RingCentral is upper quartile at +39% of EBITDA (+$3.75 million).

RingCentral’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Ringcentral Inc Peer Group as well. In most years, RingCentral was in the top quartile. Currently, RingCentral is below median at -1% of EBITDA (-$0.14 million).

RingCentral’s Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Ringcentral Inc Peer Group. (Since 2016 Business Re-investment, %EBITDA has decelerated very sharply.) In most years, RingCentral was in the top quartile. Currently, RingCentral is lower quartile at -1571% of EBITDA (-$150.10 million).

RingCentral’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Ringcentral Inc Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, RingCentral was in the top quartile. Currently, RingCentral is upper quartile at +3667% of EBITDA (+$350.45 million).

RingCentral’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Ringcentral Inc Peer Group. In most years, RingCentral was in the third quartile. Currently, RingCentral is upper quartile at +1796% of EBITDA (+$171.61 million).

RingCentral’s Change in Cash, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Ringcentral Inc Peer Group. (Since 2016 Change in Cash, %EBITDA has accelerated very sharply.) In most years, RingCentral was in the top quartile. Currently, RingCentral is upper quartile at +4030% of EBITDA (+$385.14 million).
out_cflow.2#71181.jpg

RingCentral’s Cash, %Revenue has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Ringcentral Inc Peer Group. In most years, RingCentral was in the third quartile. Currently, RingCentral is slightly below median at +84%.

PROFITABILITY

RingCentral’s return on equity has eroded very significantly since 2011 decelerating very sharply after the 2012 level.
The productivity of RingCentral’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend that accelerated very sharply after the 2017 level.
out_dpgrfs3#71181.jpg

RingCentral’s return on equity is slightly above median (-8.7%) for the four quarters ended June, 2019.
out_dpgrfs3.2#71181.jpg
Operating performance (pretax return on assets) is above median (-3.3%) reflecting asset turnover that is upper quartile (0.77X) and above median pretax margin (-4.3%).
Tax “keep” rate (income tax management) is at the lower quartile (91.1%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is below median (2.85X).

GROWTH RATES

There are no significant differences between RingCentral’s longer term growth and growth in recent years.
RingCentral’s historical income statement and balance sheet growth are not available.

Annual revenue growth has been 13.8% per year. (More recently it has been 25.0%.)

Total asset growth has been 27.6% per year.

Annual E.P.S. growth is not available.

Equity growth has been 27.2% per year.

RingCentral’s consensus growth rate forecast (average of Wall Street analysts) is 18.0% — below the average of the historical growth measures.
out_growthgrf#71181.jpg

Relative to the Ringcentral Inc Peer Group, RingCentral’s historical growth measures are erratic. Total asset growth (27.6%) has been at the upper quartile. Equity growth (27.2%) has been slightly above median. Revenue growth (13.8%) has been at median. E.P.S. growth is unavailable.

Consensus growth forecast (18.0%) is lower quartile.
out_growthgrf.2#71181.jpg

PRICE HISTORY

Over the full time period, RingCentral’s stock price performance has been exceptional. Between October, 2013 and November, 2019, RingCentral’s stock price rose +719%; relative to the market, this was a +367% gain. Significant price move during the period: 1) March, 2016 – October, 2019: +926%.
out_price#71181.jpg

TOTAL INVESTMENT RETURNS

Current annual total return performance of 107.8% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of 107.8% is upper quartile relative to RingCentral Inc Peer Group.

Current 5-year total return performance of 65.2% is upper quartile relative to the S&P 500 Composite.
Through October, 2019, with upper quartile current 5-year total return of 65.2% relative to S&P 500 Composite, RingCentral’s total return performance is upper quartile relative to RingCentral Inc Peer Group.
out_quartret#71181.jpg

VALUATION BENCHMARKS

Relative to S&P 500 Composite, RNG’s overall valuation is exceptionally high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/assets is upper quartile. Ratio of enterprise value/revenue is upper quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
out_tradv#71181.jpg

RingCentral has a major value gap compared to the median valuation. For RNG to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 14.32X to 7.53X. If RNG’s ratio of enterprise value/revenue were to fall to 7.53X, its stock price would be lower by $-74 to $84.
For RNG to fall to lower quartile valuation relative to the RingCentral Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 14.32X to 3.18X. If RNG’s ratio of enterprise value/revenue were to fall to 3.18X, its stock price would decline by $-121 from the current level of $158.

VALUE TARGETS

RNG is expected to continue to be an important Value Builder reflecting capital returns that are forecasted to exceed the cost of capital.
RingCentral’s current Price Target of $28 represents a -82% change from the current price of $157.65.
RingCentral’s very low appreciation potential results in an appreciation score of 3 (97% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 3, the high Power Rating of 98 results in an Value Trend Rating of C.
out_vc#71181.jpg

RingCentral’s current Price Target is $28 (+121% from the 2018 Target of $13 but -82% from the 11/04/19 price of $157.65). This dramatic rise in the Target is the result of a +40% increase in the equity base and a +59% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a slight positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
out_wc.1#71181.jpg
out_wc.2#71181.jpg

PTR’s return on equity forecast is 18.3% — slightly above our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2011 and 2018. The current forecast is significantly above the 2015 low of 4%.

PTR’s growth forecast is 26.0% — above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2011 and 2018. The current forecast is significantly above the 2011 low of 5%.

PTR’s cost of equity forecast is 11.1% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic decline between 2013 and 2018. The current forecast is above the 2016 low of 7.7%.
out_vc.2#71181.jpg
At RingCentral’s current price of $157.65, investors are placing a positive value of $125 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 22.0% per year, and a return on equity of 14.8% versus a cost of equity of 10.6%.
PTR’s 2020 Price Target of $28 is based on these forecasts and reflects an estimated value of existing assets of $49 and a value of future investments of $-20.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

Be the first to comment

Leave a Reply

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.