CBZ, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

CBZ, Inc. is a national provider of financial, insurance, and employee services designed to help its clients and their businesses grow and succeed. It provides these services through three practice groups—Financial Services, Benefits and Insurance Services, and National Practices.

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

CBZ, Inc. operates in a rather diversified yet interconnected industry. Its primary focus is on providing financial, insurance, and employee services, each tailored to meet specific client needs. The services are primarily marketed to small to mid-sized businesses, government entities and not-for-profit enterprises throughout the United States and parts of Canada.

To gain better understanding, let’s explore each of CBZ’s operating segments.

  • Financial Services: This segment offers a comprehensive suite of traditional accounting services, including tax compliance, audit, assurance, and advisory services. It also provides more specialized solutions such as forensic accounting and litigation services, focusing on financial matters.
  • Benefits and Insurance Services: This segment provides consultative and brokerage services, offering employee benefits consulting, retirement plan management, and property and casualty insurance. These services are aimed at both employers and their employees.
  • National Practices: This division primarily involves managing cybersecurity, IT infrastructure, and healthcare consulting. They provide managed services related to business continuity, data security, and technology, aiming to support other services.
  • The industry is currently seeing growth in the IT services, as more businesses are relying on it to manage their finances and operations.
  • The increasing complexity of regulatory compliance (tax, cybersecurity, etc.) and a tight labor market, also means more businesses are turning towards outsourcing, resulting in higher demand for services related to HR, consulting and insurance.
  • The banking sector has witnessed disruptions in traditional business models due to increased competition and market fluctuations, potentially affecting lending and borrowing activities.

Competitive Landscape

  • CBZ’s diversified business model allows it to operate in various industries. This also means they face competition from many sources. For example, in the accounting and tax sector, they face competition from major firms like Deloitte, Pwc and KPMG.
  • They face competition from large insurers like United Health and Cigna in benefit and insurance services.
  • Finally, in national services group, they compete with large firms like Accenture and Deloitte in the technology services area.
  • Despite this competitive landscape, CBZ has several key competitive advantages: strong brand recognition, large customer base across many sectors, and ability to cross-sell services to their existing customers. They have also focused on building a reputation for quality service and have developed a team of skilled professionals across its different businesses.

What Makes the Company Different

  • While other companies specialize in single or some of CBZ’s business areas, CBZ’s strategy is to provide “end-to-end” solutions, all tailored to support clients on their specific needs, in an integrated manner, from finance to benefits. That is their most obvious and strongest differentiator.
  • They also claim to have “people-focused” company culture, attracting and retaining top talent, which can provide a differentiated edge.
  • CBZ has successfully completed several strategic acquisitions, which have expanded their offerings and reach. They claim to be selective when acquiring and integrating these companies, looking for a perfect fit with the existing business.
  • The management is very keen on developing a strong culture that attracts and retains talent.

Financials

CBZ’s financials show a mix of trends reflecting both strong growth and challenges in specific segments.

  • Revenue Growth: CBZ has shown solid revenue growth, rising to over $1.4 billion in 2022, from $1.1 billion in 2021, demonstrating a robust demand for its services. They have maintained growth during this year as well but at a lower rate.
  • Profitability: Profit margins have experienced fluctuations, primarily due to the impact of acquisitions, higher operating expenses, and shifts in the industry. Despite these pressures, net income has shown overall stability in the last 3 years.
    • Gross margin has been declining for the last 3 years (from 36% to 30.4%), and is due to the increase in the cost of services, especially in professional and technology services.
    • Operating margin has stayed somewhat stable, and is in the range of 16-19% which is not very high for an established company with so many lines of business.
    • Net income margin has stayed in the range of 11-14% in the past 3 years.
  • Operating Expenses: Operating expenses have increased significantly YoY which has been major reason behind decline in margins.
  • Financial Services: This segment has been driving the majority of revenues, showing solid growth YoY. However, this is also the segment that has lower margin compared to others, so the strong performance of this segment is partially responsible for the decrease in company’s overall margin.
  • Benefits and Insurance Services: This segment also demonstrated solid revenue growth YoY and has a high margin.
  • National Practices: This segment has the highest margins amongst the 3 and is also growing at a very good pace. They will likely continue to drive growth and profitability for the company in the coming future.
  • Cash Flow: CBZ demonstrates strong positive cash flow from operations, which has allowed them to undertake several acquisitions and share buyback programs.
  • Debt: They have a credit facility but otherwise, they have very little debt. Their debt to equity is still in the appropriate levels but there has been increased borrowing in the last year to facilitate mergers and acquisitions.
  • Acquisitions: Acquisitions are a major factor in CBZ’s financials and revenue growth. All of their recent acquisitions are centered on providing them a wider network and more diversified services.
    • They have spent hundreds of millions in acquisitions in past 2 years and have acquired assets with varying degrees of profitability.
    • Their approach is to acquire and then restructure the acquired companies to synergize operations. However, this restructuring costs significant investment and requires a longer time frame to show positive effects on revenue and margin.
  • Share Repurchase Program:
  • They have a share repurchase program that is used to return a significant amount of capital to shareholders.

Moat: 3 / 5

Based on analysis, CBZ appears to have a moat, but its strength and longevity are somewhat limited. Here’s a detailed breakdown:

  • Intangible Assets: They do have strong brand and client relations, but they are easily replicable. Their brand doesn’t provide them with any significant power on prices or customer captivity as they are often perceived as a service provider rather than a product provider. Therefore, their intangible assets are not a very strong moat.
  • Switching Costs: Switching costs are relatively high in services that involve high integration. Companies using CBZ’s financial services or payroll services will encounter significant switching costs because they will have to rebuild their infrastructure with new providers. Those that will have to invest resources and time in new system implementation and training, they will likely have high client stickiness.
  • Cost Advantages: The economies of scale at which CBZ operates in many industries allows it to keep costs low. They also use sophisticated methods for client data management, tax calculations and payroll services. However, these are things that are also replicable and are often used by other firms as well. Therefore, the cost advantage is not a very strong moat.
  • Network Effects: Network effects are non-existent, as their services do not create a network which will drive prices or make customers more reliant on them.
  • Overall moat: The switching costs are the primary source of a moat for CBZ. They also do have some limited cost advantages, but their intangible assets and network effect are weak. I’d rate it 3 out of 5. A wide moat is typically something that is very hard to replicate and where a company is insulated from competition for many years. CBZ doesn’t qualify for that as well.

Risks to the Moat

  • Increased competition from other firms: As the industry continues to grow, more and more companies may seek to grow in these services, which may put downwards pressure on margins and revenue.
  • Disruptive technologies: New technologies, especially those related to AI, have the potential to automate a lot of accounting work, which may undermine their business.
  • Economic downturns: A slowdown in the economy could reduce the demand for their services as companies cut back on spending, which would impact CBZ’s revenue and profits.
  • Increase in costs: Operating costs can rise due to high inflation and tight labor market which may affect profitability.
  • Acquisition Risks: Integration of new businesses is always hard, and a failure or poor execution with this acquisition strategy could undermine performance and lead to write-offs.
  • Changes in regulation: Regulatory changes can increase compliance costs which would impact their bottom line.
  • Client Concentration: Despite having a large customer base, a significant concentration of clients in few industries/segments would expose the company to risk associated with those sectors/clients. They need to continuously diversify their client base.
  • Data security: Data security has become a major concern and their failure to protect client data can erode trust and result in fines and legal action against the company.

Business Resilience

CBZ demonstrates strong resilience due to the following:

  • Diversification: CBZ serves clients across a wide array of industries, meaning they are better suited to withstand any potential problems and downturns in any single sector.
  • Recurring Revenue: A substantial portion of revenue for the accounting and insurance segments comes from recurring and predictable sources (contracts, retainers, etc.), allowing for more stability in cash flow.
  • Expertise and Talent: They have access to a large number of skilled professionals and talented workforce to maintain high quality of service and sustain competitive advantage.
  • Strong cash flow from operations. Despite the difficulties, they generate a solid level of free cash flows which could be used to invest in their business or to pay out their shareholders.
  • History of growth: They have shown strong resilience and a strong record of growth through various economical and stock market downturns.

Understandability: 3 / 5

The business model is somewhat complex as it operates in a diverse array of sectors and uses different strategies for each, making it a 3 out of 5 for understandability. While their underlying business model of providing professional business services is easily understandable, the many moving parts, and the way these services are structured, makes it less straightforward.

Balance Sheet Health: 4 / 5

The balance sheet appears healthy with a good amount of cash and readily marketable assets. But we should keep a close eye on changes in debt and leverage. Overall, I would rate the balance sheet as 4 out of 5. They do have significant goodwill and intangible assets due to acquisitions which needs to be accounted for.

Recent Concerns / Controversies and Management Response

  • Inflationary pressures and rising labor costs are a concern for CBZ and that has been mentioned by management in the earnings call, which in turn is impacting profit margins. Management is focused on optimizing cost of operations and passing the increased costs to customers.
  • Acquisition Integration: The company is actively making acquisition and trying to expand the business. However, the integration is not easy and costs are going to continue to impact the company. Managements acknowledge the difficulties but still believe they can realize the benefits of these transactions.
  • Competition: The industry is becoming more competitive. Management is focused on maintaining their client retention and exploring new avenues of growth. They are also focusing on quality of service for their loyal customer base which will provide stickiness to their customers.
  • Shift to technology: The company is facing challenges posed by new technological trends, therefore they are focusing on developing AI/automation related tools to support their operations. Management also believes these developments will allow them to operate in a more efficient manner with their employees.
  • Uncertain macro economic environment: The management team understands the risk of economic downturns, but they also believe that many of their businesses have some resilience against these macro events, especially the health benefits sector.
  • Increased short term debt for acquisitions: It is worth keeping a close eye on the level of debt as they are using a credit facility with floating rates to fund acquisitions. The increase in debt increases the risk, especially during periods of high rates.
  • Decrease in EPS: Despite having high revenues, their EPS has dropped due to operating inefficiencies and the high cost of recent acquisitions.
  • Share Repurchase Program: This is a way for the company to signal confidence, however many believe that they are just trying to boost the share price, and using debt to repurchase overpriced shares.

Despite the challenges, the management team seems optimistic about the future prospects. They are focusing on sustainable growth, which will be driven by a robust strategy and strong client relationships. The new business areas are also expected to offset the decline in some of the traditional operations.