December 27, 2017 - 6:56pm EST by
2017 2018
Price: 7.05 EPS see write-up see write-up
Shares Out. (in M): 25 P/E see write-up see write-up
Market Cap (in $M): 176 P/FCF see write-up see write-up
Net Debt (in $M): 14 EBIT 0 0
TEV (in $M): 181 TEV/EBIT see write-up see write-up

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Post-turnaround, business services company with sticky customer base, obfuscated earnings power, a nascent software business, with strong cash flow and take-out potential, trading for ~7x PF EBITDA

Note: All market data as of 11/27/2017

Company Description (modified from most recent 10-K):

PRGX Global, Inc., together with its subsidiaries, is a global leader in recovery audit and spend analytics services, providing services within its clients' Source- to- Pay ("S2P") business processes. PRGX’s services include recovery audit, spend analytics and supplier information management ("SIM") services. The Company is based in the United States of America (“U.S.”) and serves clients in more than 30 countries. PRGX Global, Inc. was incorporated in the State of Georgia in 1996.

Situation Overview:

  • PRGX has underperformed over the past few years, due to concerns around its retail end-market exposure, price compression due to commoditization of service offering, a failed growth strategy by the prior CEO, and execution misses in the core business.
  • PRGX’s core value proposition is providing recovery auditing services to retailers through the review of massive amounts of data across a client’s supply chain covering a multitude of vendors and thousands of SKU’s.
  • The decline in sales by traditional retailers has been perceived as a negative for PRGX by the market. Despite this, our research suggests Amazon and other ecommerce players are PRGX customers and are using PRGX’s services at a rate that is greater than traditional retailers do and therefore is a net positive for the Company.
  • The prior CEO spent considerable effort and capital unsuccessfully trying to build an audit business in the healthcare sector. After failing to achieve scale, and in order to focus on the core business, the current CEO shut the healthcare effort down.
  • The current management team is focused on leveraging the Company’s core data sets with existing customers to improve its service offering and add related, higher value-added services. The current CEO has invested ~$20mm cumulatively in these initiatives resulting in organic growth returning across all geographies for the past 5 quarters. The Company believes its Adjacent Services business represents a huge opportunity as it leverages existing data sets resident on PRGXs servers to sell additional services focused on supply chain savings. The Company is also investing in sales and marketing and has made a number impressive executive hires including a top executive from Connolly / Cotiviti, one of PRGX’s biggest competitors.
  • PRGX is continuing to integrate and capitalize on its recent acquisitions (Lavante in October 2016, and Cost & Compliance Associates in February 2017). PRGX recently launched its SaaS-based platform, Optix in February 2017; the goal of the platform is to convert the business into more of a recurring revenue business model that is less labor intensive (i.e., automating a lot of the data analytics functions that previously required a lot of man-hours.)


Investment Thesis:

At ~ 7x PF Mgmt. 2017 EBITDA guidance, we believe PRGX has a lot of upside given its return to organic growth and improving profitability, which is currently masked by abnormally high growth investments. Northern Right Capital Management, an activist investment firm focused mainly on small and mid-cap companies, has board representation and should be a staunch advocate for shareholders (note that Northern Right acquired ~$880,000 of stock as recently as 12/12 and 12/13). We see two potential event-drive paths for this idea to work out: 1) After five consecutive quarters of growth supported by a 99% customer retention rate, the turnaround continues to drive top-line growth and margins improve as the business scales and growth initiatives are successful – the business will re-rate as the market recognizes the improved attractiveness of the base business and the growth trajectory of Adjacent Services business; 2) turnaround is successful, core business stabilizes, but growth initiatives fail to bear fruit – we believe that in this case, the management team will become more disciplined on the cost side, and run the business in steady-state mode; the market should still re-rate the business as it becomes clear that the earnings power of the core business has been obfuscated by abnormal levels of investment. Given the undemanding current valuation being ascribed to the business, we do not see substantial downside risk as long as the core business remains reasonably stable. An additional lever of potential value creation is an aggressive stock repurchasing plan. The Company has been an aggressive buyer of its stock, and is likely going to continue opportunistically doing so (since launching its share repurchase program in 2014, the company has spent ~$45mm on share repurchases, at an average price of $5.17, resulting in the fully diluted share count decreasing from 29.6mm at year-end 2013, to 24.7mm at 2Q17). Furthermore, if the public markets fail to realize the value inherent in PRGX’s business, it is likely that private equity players or other specialty consulting firms will be interested in the franchise given the attractive valuation, high cash flow generation potential and ability to further scale through acquisition.

Financials / Valuation:

Management guided to ~$21mm of adjusted EBITDA at the midpoint on the 4Q16 call, and recently reiterated this guidance on the 2Q17 call.  Adjusting for the run-rate EBITDA losses in the adjacent services business of $4.8mm as of 3Q17, PF Mgmt. adjusted EBITDA guidance for 2017 is $26.0mm. At the current TEV of ~$182mm, this represents a multiple of ~7x EBITDA. Our price target of ~$10.52, or ~40% higher than the current trading price, is based on ascribing a 10x multiple on the PF 2017 Mgmt. EBITDA guidance, which we feel is fair given PRGX’s business quality as compared to some of its publicly traded peers. The tables below illustrate our calculation of PF LTM EBITDA, Target Valuation, and detail on the company’s past share repurchases.


Equity Value $185.3
Less: Cash 12.9
Less: NOL Value 8.6
Plus: Debt 13.6
Plus: C&CA Potential Earn Out Liability 4.0
TEV $181.4
x LTM Sales 1.2x
x 2017 MGMT PF EBITDA 7.0x
FCF Yield to Equity 9.4%


Summary Income Statement
  2013 2014 2015 2016 LTM
Total revenue $178.3 $161.6 $138.3 $140.8 $153.7
Gross Profit  $65.4 $50.7 $45.1 $49.5 $54.6
% Margin 36.7% 31.4% 32.6% 35.2% 35.5%
EBIT $4.7 $2.5 $5.1 $3.3 $1.9
% Margin 3% 2% 4% 2% 1%
EBITDA $30.9 $25.3 $21.5 $19.5 $19.6
% Margin 17.3% 15.6% 15.6% 13.8% 12.7%
2017 MGMT PF EBITDA     $26.0


EBITDA Calculation
2017 MGMT EBITDA Guidance $21.2
Plus: RR Losses from Adjacent Services Business $4.8
2017 MGMT PF EBITDA Guidance $26.0


Illustrative Valuations, 2017 MGMT PF EBITDA TEV Equity Value PPS % Premium to Current
8x $207.7 $211.5 $8.45 14.2%
9x $233.6 $237.5 $9.48 28.2%
10x $259.6 $263.4 $10.52 42.2%
11x $285.5 $289.4 $11.56 56.2%
12x $311.5 $315.3 $12.59 70.2%


Trading Comparables
  Stock Price Market Enterprise TEV / Sales TEV / EBITDA
Company Name 11/27/17 Cap Value LTM CY + 1 LTM CY + 1
Pure Play Comps              
Cotiviti Holdings, Inc. $31.79 $2,936.4 $3,587.2 5.4x 5.3x 14.9x 13.5x
Broader Professional Services Comps            
FTI Consulting, Inc. 41.64 1,541.5 1,844.6       1.0       1.0     11.6       9.4
HMS Holdings Corp. 16.16 1,358.8 1,519.3       3.0       3.0     16.0     12.5
Huron Consulting Group Inc. 40.40 858.5 1,224.8       1.7       1.7     12.7     11.8
Navigant Consulting, Inc. 18.70 858.7 1,026.4       1.1       1.1       8.0       7.6
Median, Professional Svcs.   $1,108.7 $1,372.1 1.4x 1.4x 12.1x 10.6x
Average, Professional Svcs.   $1,154.4 $1,403.8 1.7x 1.7x 12.0x 10.3x


Precedent Transactions
Date Target Acquirer EV / LTM EBITDA Multiple
Jul-12 Connolly Advent International 12.0x
Jul-14 Apex Analytix Carousel Capital N/A


Share Repurchase Overview
Period Shares (mm) $ mm PPS
2014              3.6 $22.7 $6.31
2015              4.2 $18.2 $4.33
2016              0.8 $3.6 $4.50
9M 2017                -   $0.0 N/A 
Total              8.6 $44.5 $5.17
Total Authorization   $60.0  
Amount Remaining   $15.5  


M&A Target:

We believe that PRGX is an attractive buyout target due to its attractive valuation and  substantial opportunities for near term margin improvement, given the recent levels of elevated spending (and  public company costs which are relatively high given the small size of the firm.) In addition to financial buyers, there are likely a number of strategic buyers for whom it might make sense to acquire PRGX – i.e., a close competitor like Cotiviti which was formerly a portfolio company of Advent, or a Business Process Outsourcing firm that already does business with a lot of the Fortune 50 (in the latter case, there would be substantial opportunity to cut costs and increase the customer base of the business).


  • As mentioned earlier, PRGX has substantial exposure to retail customers – if business through Amazon and other ecommerce players does not replace enough lost retail revenue as traditional retailers shrink, could see decreased revenue base and operating deleveraging
  • Poor capital deployment decisions – new management team appears disciplined in their approach to capital allocation thus far, but any mistakes on this front would harm the market’s view of the business, especially in light of the missteps made by the prior management team
  • Failure of the effort to shift to a more platform-oriented SaaS model – CEO has previously mentioned that some of PRGX’s services risk getting commoditized as companies use their learnings from PRGX to in-house certain processes (i.e., PRGX discovers an error and then a customer in-sources a process to check for similar errors in the future and no longer needs PRGX’s services for that use case)
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



  • Operating performance improvement as turnaround continues to bear fruit
  • Decrease in level of infrastructure / technology spend reveals true earnings power of the business
  • Successful transition into more of a SaaS / recurring revenue business model as the rollout of the Optix Platform ramps up and overall Adjacent Services business becomes profitable and meaningful
  • Continued, opportunistic stock repurchase activity
  • Sale of the business to a financial or strategic buyer
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