ASGN Incorporated

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

ASGN provides IT and professional staffing and consulting services across commercial and government sectors, operating within both the public and private markets, with an emphasis on digital transformation and technology solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview ASGN is a leading provider of IT services and solutions, including digital transformation, cybersecurity, and IT staffing across many sectors including government, finance, healthcare, and technology. Their revenue comes from commercial and government segments, with the commercial segment making up the bulk of the revenues. The commercial sector comprises services to clients across various industries and government sector serves both federal and state governments.

Revenue Distribution

  • Commercial Segment: Provides IT services, consulting, and staffing to commercial clients across several industries. This segment accounts for the majority of ASGN’s revenue, demonstrating its strength in the private sector.
  • Government Segment: Delivers IT solutions and consulting to federal, state, and local governments. While a smaller portion of the company’s revenue comes from this segment, it shows ASGN’s presence and expertise in public sector contracts.

Industry Trends and Competitive Landscape The IT services and staffing industry is influenced by several key trends:

  • Digital Transformation: The increasing demand for digital technologies and services across industries creates significant opportunities for companies that enable digital transformation.
  • Cybersecurity: The escalating threat of cyberattacks and data breaches creates a demand for cybersecurity solutions. Companies with expertise in this area are likely to benefit from increased spending on security-related services.
  • Hybrid Work Models: The shift towards hybrid work models creates a demand for IT infrastructure and managed services that facilitate distributed workforces.
  • Talent Shortages: The IT staffing sector is influenced by the talent shortage, as many companies seek specialized professionals to fill skills gaps.

ASGN competes with other IT services and consulting firms, including both large players like Accenture and Tata Consultancy Services, and specialized niche players. The competitive landscape is often fragmented and the ability to offer unique solutions, develop talent rapidly, and acquire companies that complement the business are vital in differentiating in this sector.

What Makes ASGN Different

  • Specialization in IT: While many companies offer consulting and IT services, ASGN is more focused on IT. This gives them a depth of knowledge in this field that might appeal to customers.
  • Long-term Contracts: A large portion of revenue is recurring as the company has many long-term government and private sector contracts. This can potentially enable future revenue visibility.
  • Acquisition History: ASGN often acquires businesses in specialized sectors to complement their existing offering and expand to new markets. This also increases the complexity of the business.

Financial Metrics * Revenue Growth: ASGN has generally shown a consistent trend of revenue growth, although influenced by acquisitions, market trends, and economic factors. In recent years, they have also focused on higher revenue per employee, due to improved operating efficiency and better margins. * Margins: Gross margin and operating margins are generally stable, with operating margins sometimes varying due to one time items. The EBITDA margin is decent, but could be improved.

  • Debt: The debt has been relatively stable, but not low, and represents a liability that is important to follow.
  • Cash Flow: The cash flows have fluctuated and have been negative for certain periods. In 2022, for instance, the company showed negative operating cash flows. Free cash flow generation is critical to understanding a business’ ability to return money to its shareholders.
  • ROIC: Return on invested capital (ROIC) is another metric that reveals much about the ability of a company to produce profit. The most recent report suggests that ROIC has been positive. But the ROIC data is needed consistently to provide useful insights.

Moat Analysis

  • ASGN’s moat can be primarily attributed to:
    • Customer switching costs: It is costly for clients to switch service providers in between projects or for long-term contracts.
    • Brand: Though not very strong, ASGN enjoys brand recognition within certain specific markets, like the government sector.
    • Unique skills: The specific skills that ASGN offers in technology could act as a barrier to competitors
  • Considering these factors, a moat rating of 3/5 appears to be appropriate for ASGN. While they do have sources of competitive advantage, they are vulnerable to competition and change in market conditions

Risks to the Moat and Business Resilience

  • Competition: The IT services industry is very competitive, with a lot of players both big and small.
  • Technology Changes: The rapid technological advancements might make their services obsolete or less needed for customers.
  • Economic Slowdown: The company’s business is cyclical as they provide workforce and project based consulting. Hence, downturns in the economy may lead to a reduction in business. * Increased Borrowing Rate: Increased interest rates makes debt funding more expensive, affecting profitability.
  • Acquisition Integration: ASGN has historically grown through acquisitions, and this brings risks to integration, high purchase price or not performing as predicted.
  • Talent Attrition: The company’s success depends a lot on their employees, high talent churn can prove to be detrimental.

ASGN is moderately resilient because it has diversified clients and also has recurring revenues. The wide range of clients and contracts allows it to withstand volatility in different sectors. Furthermore, acquisitions that bring additional capabilities and customers also help. However, as is common with these types of businesses, the company has very high operating leverage.

Understandability The business model of IT and consulting services is inherently complicated due to diverse services, multiple segments, acquisitions and complex contracts. The analysis and valuation of these aspects can be tough. Therefore, a understandability score of 2/5 seems fair.

Balance Sheet Health ASGN has shown improving profitability and a decent level of assets to liabilities. The debt has remained stable. Also, the company is generating a decent and positive operating cash flow as per latest data. These factors result in a balance sheet health rating of 4/5.

Recent Concerns, Controversies and Management outlook

  • Macro-Economic Uncertainty: The primary concern for ASGN is that a downturn in the economy might lead to a reduction in sales and margins and thus reducing profitability. Management is cognizant of these challenges and believes in its financial resilience and flexibility.
  • High Inflation: Another key point brought up in conference calls, that the wage rates were increasing more than what was historically predicted by the management, putting pressure on operating margins, especially in the near term.

In response to these and similar concerns, management focuses on strengthening their competitive position, through improving quality of service and delivery, and focusing on long-term and value-creating projects. They are also optimizing their cost structure to overcome cost pressures, with an emphasis on organic growth and operational efficiency. They believe that these methods will let them maintain their profitability as the market evolves.