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Needham analyst Kyle Peterson initiated coverage on Donnelley Financial Solutions, Inc. (NYSE:DFIN) with a Buy rating and price target of $55.
Given DFIN's competitive positioning, scaling software business, and capital markets activity approaching a bottom, the analyst views the opportunity as favorable for GARP investors.
The analyst believes the company's focus on returning capital to shareholders through an active share repurchase program will help the stock re-rate higher.
Peterson believes that as the company expands and enhances its offerings, DFIN's competitive advantage will widen, setting up plenty of room for LT growth.
The analyst believes that as the software business expands toward management's MT target of 55%-60% of revenue (up from FY22's 33.5% of revenue), both growth and margins should see improvement.
Given the opportunities, the analyst expects the company to see a more durable revenue stream less dependent on capital market conditions.
Once the market conditions stabilize, transaction activity (pre-IPO, IPO, M&A, etc.) should pick up and help growth inflect higher, gradually recovering in 2H23/1H24.
Market volatility is an issue throughout FY23 and into FY24, causing a slower-than-expected recovery in capital markets activity, Peterson cautioned, talking about the Bear case assumptions.
The analyst's model calls for 2.2% and 5.5% software revenue growth in FY23 and FY24, respectively, considering conservative assumptions around the capital markets and M&A environment.
The analyst forecasts 4.5% growth in tech-enabled solutions revenue in FY24, given the expectation for more favorable capital markets and economic conditions.
Peterson projects 13% EPS growth in FY24 due to expectations for EBITDA growth and a modest reduction in interest expense.
Price Action: DFIN shares are trading higher by 2.58% to $45.40 on the last check Friday.
Posted In: DFIN
