Warren Buffett famously wrote that "'turnarounds' seldom turn" in his 1979 letter to shareholders. It is easy to agree with Warren Buffett on investing and I agree on turnarounds. The most common outcome with turnarounds seems to be that they fail to turn. In order to increase the odds, it is great to find a turnaround that has already started to make the turn, but hasnt yet seen the share price respond. Atento (ATTO) may be one of those companies.
Atento was created when Telefonica (TEF) spun out its call center business in 1999, and for many years, Telefonica was the primary customer. Atento has suffered from customer concentration, a lower tech product offering and margin issues. However, the company is addressing each of these issues. CEO Carlos Lpez-Aada took the reins at the end of 2018 and set a path forward with the companys Three Horizons Plan.
Atentos turnaround is characterized by several important areas of focus: customer diversification, product offering growth, geographic expansion and EBITDA margin expansion. Each of these have shown important improvement and are evidence of a company actually turning.
Given the companys origin, it is not surprising that Atento began as a company hugely reliant on Telefonica. Way back in 1999, Telefonica represented about 90% of Atentos business. So far in the first three quarters of 2020, Telefonica has accounted for 32% of Atentos business. That leaves Telefonica as an important customer, but Atento is no longer a single customer company. The company has made progress in the recent quarters as in Q3 2020, multi-sector accounted for 67.7% of TTM revenue, versus 60.7% of revenue just prior to the start of the Three Horizon Plan.
Atento reports results grouped by three regions: Brazil, the Americas and EMEA. Brazil is Atentos home country and its largest and most important single market. As of last month, Atento had 27.9% market share in Brazil, well ahead of any other competitor. Having a dominant base is important and the Brazilian market produces the companys best margins. I expect Brazil to remain Atentos most important market and hope for growth there. In fact, having by far the largest market share in the country should only be supportive of the growth through scale advantage.
However, it is also important that Atento grows and expands in other countries. Obviously, the more markets, the more opportunities for growth. Additionally, geographic expansion may help with currency risks. Atento trades in the US and has US dollar denominated debt and so can be affected by currency fluctuations, particularly declines of the Brazilian real.
Atento has been working to diversify from a pure call center company to a more diversified customer support company with a better customer service support product. The transformation provides Atento with the opportunity for increased margins and a growing moat. The more advanced the services, the more value that Atento provides and the greater the moat and margins. Atento calls their more advanced product offerings next generation services and the next generation services have accounted for 50% of new sales in 2020 versus 42% in 2019. The more this continues, the stronger the margin and moat trends.
Flowing from the client diversification, product offering and costs controls, Atento has started to show improving margin. EBITDA margins were 12.7% in Q3 and Atento is targeting 14-15% margins. Atento has dramatically improved cash flow metrics in 2020. Through the first 9 months of 2019, Atento had operating cash flow of negative $29 million and free cash flow of negative $88 million. Both of those have dramatically improved in 2020 and the company has had positive operating cash flow of $40 million and positive free cash flow of $9 million through the first 9 months of 2020. Further improving margins and a focus on costs should continue to improve these metrics.
The risks and catalysts here are inter-related and so Ill address them together. Debt and refinancing is the big one. Atento has a net debt position of $514.2 million as of the end of the third quarter. About $500 million of that debt is due in August 2022. The company announced that they were going to refinance in September, but called off the refinancing by October due to market conditions. It was not a confidence inspiring move. However, conditions may be improving and Atento may be in a better position to refinance the notes next year than they were this fall. In particular, the Brazilian Real has been strengthening and Atento has been reporting improved EBITDA. Along with that, the current notes are trading more strongly. If waiting a couple quarters allows Atento to secure the new financing at better terms such as a lower rate and longer term, then waiting will be well worth it. I would hope, however, that next time they attempt a refinancing the company be sure they can complete it.
Atentos reliance on Brazil and the Latin American market is another risk. Atento borrowed in US dollars but most revenues are not in US dollars. When local currencies decline, Atentos revenues decline in US dollar terms.
The Brazilian real to USD ratio started the year at just over 4 and moved to over 5.8 in the spring. The real has now recovered some and is trading at 5.06 as of December 12. If the real continues to recover, that will help Atentos financial results, but the opposite is true as well and the setup of borrowing in a different currency than most revenues inherently introduces some risk due to the mismatch.
The turnaround seems to have started, but it is still in its early stages. Even with the large improvement in FCF, it has only been $9 million for the first 9 months of 2020. Continued improvement in revenues, mix and margin should bolster the FCF number, but it is currently only tenuously positive. A small stumble could take the company back to a negative FCF situation.
Atento has an Enterprise Value of $703 million and a market cap of only $188 million, so the stock price is leveraged to small changes in the value of the company. A doubling of the EV would lead the market cap, and thus the stock price, more than quadrupling.
Is a doubling of the EV possible? I think so. Atento had EBITDA of $44.8 million in the most recently reported quarter. EBITDA trends are favorable with the increasing margins and improving currency situation. If these continue, I think that yearly EBITDA could reach $200 million by 2021 or 2022. A 7x EBITDA multiple on $200 million of EBITDA would lead to a doubling of the EV, and as discussed above, a more than quadrupling of the stock price to about $60.
A 7x multiple to EBITDA wouldnt be unreasonable if Atento is able to execute a favorable refinancing, the company is able to continue to improve margins and execute other components of their Three Horizon Plan, and the Latin American markets and currencies continue to stabilize. That is a number of conditions and present very real risks, but some of the turn already appears to be in progress.
Turnarounds may rarely turn, but every now and then one does.
Disclosure: I am/we are long ATTO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Follow this link:
Atento: Turnaround In Progress With 100%+ Potential Upside And A Catalyst - Seeking Alpha
- Progress Lighting - Home - December 22nd, 2016 [December 22nd, 2016]
- Home - Progress Lighting Outlet - Authorized Progress Dealer - January 13th, 2017 [January 13th, 2017]
- What does progress mean? - Definitions.net - January 13th, 2017 [January 13th, 2017]
- Progress Fire Company Harrisburg, PA - January 13th, 2017 [January 13th, 2017]
- Homepage Center for American Progress - January 13th, 2017 [January 13th, 2017]
- Progress being made on possible grocery store co-op in Winston-Salem - myfox8.com - February 7th, 2017 [February 7th, 2017]
- Nioh Review-in-Progress: FromSoftware's Formula Evolved - Shacknews - February 7th, 2017 [February 7th, 2017]
- Deutsche Bundesbank Cites Progress With Blockchain-Based Settlement - CryptoCoinsNews - February 7th, 2017 [February 7th, 2017]
- IMF: Greece's debts are still unsustainable despite progress - The Seattle Times - February 7th, 2017 [February 7th, 2017]
- Think Progress Editor Mocks Audi for Equal Pay Super Bowl Ad - Breitbart News - February 7th, 2017 [February 7th, 2017]
- Progress apparent on defense - Pittsburgh Steelers - Steelers.com - February 7th, 2017 [February 7th, 2017]
- IMF: Greece's Debts are Still Unsustainable, Despite Progress - Voice of America - February 7th, 2017 [February 7th, 2017]
- Can US disrupter-in-chief trigger some progress? - Jerusalem Post Israel News - February 7th, 2017 [February 7th, 2017]
- The Cost of Progress - Slate Magazine - February 7th, 2017 [February 7th, 2017]
- Cavaliers' pitching rotation a work in progress | Cavalier Insider ... - The Daily Progress - February 8th, 2017 [February 8th, 2017]
- High schoolers create 'zines for progress' with WolfsonianFIU - FIU News - February 8th, 2017 [February 8th, 2017]
- Cries of 'dictator' show Pope Francis is making progress - Crux: Covering all things Catholic - February 8th, 2017 [February 8th, 2017]
- Officials: City is making progress in effort to address opioid crisis - The Union Leader - February 8th, 2017 [February 8th, 2017]
- IN OUR VIEW: Work Ready in Progress for Carter - The Independent - February 8th, 2017 [February 8th, 2017]
- BP's Earnings Keep Showing Progress, Even if the Headline Results Don't Say So - Motley Fool - February 8th, 2017 [February 8th, 2017]
- Women's Progress in the Boardroom Took a Hit in 2016 - Inc.com - February 9th, 2017 [February 9th, 2017]
- Blight Elimination Progress, Uplifting - MyWabashValley - February 9th, 2017 [February 9th, 2017]
- Rauner 'heartened' by progress in Springfield - Bloomington Pantagraph - February 9th, 2017 [February 9th, 2017]
- David Johnson showed off the insane progress he's making in rehab from his knee injury - USA TODAY - February 9th, 2017 [February 9th, 2017]
- Through the looking glass: Tower view showcases progress on Amazon's unique biospheres - GeekWire - February 9th, 2017 [February 9th, 2017]
- Britney Spears Says Niece Maddie Is 'Making Progress' After ATV Accident: 'Let's All Keep Praying' - PEOPLE.com - February 9th, 2017 [February 9th, 2017]
- Progress on vet's Mustang to be unveiled - Indianapolis Star - February 9th, 2017 [February 9th, 2017]
- Evgeni Malkin making 'progress,' could return Saturday in Arizona - Pittsburgh Post-Gazette - February 9th, 2017 [February 9th, 2017]
- Forecasters See Slow Progress in Labor-Market Measures Favored by Trump Administration - Wall Street Journal - February 9th, 2017 [February 9th, 2017]
- 'Paper boys' were the lifeblood of The Daily Progress - The Daily Progress - February 10th, 2017 [February 10th, 2017]
- Cliffs Natural Resources Is Showing a Lot of Progress on Its Return to Profitability - Motley Fool - February 10th, 2017 [February 10th, 2017]
- ATA says states' telemedicine progress a mixed bag ... - FierceHealthcare - February 10th, 2017 [February 10th, 2017]
- Seltzer's Notebook | Colangelo Encouraged by Sixers' Progress - Sixers.com - February 10th, 2017 [February 10th, 2017]
- The Trump administration can't entirely roll back progress on climate change here's why - Washington Post - February 10th, 2017 [February 10th, 2017]
- Colts position review: OL showed legit progress, but work remains - Indianapolis Star - February 10th, 2017 [February 10th, 2017]
- Egyptian Economy Making Slow, Tentative Progress - Voice of America - February 10th, 2017 [February 10th, 2017]
- ATA: States show mixed progress with telemedicine | Healthcare Dive - Healthcare Dive - February 11th, 2017 [February 11th, 2017]
- Louisville City notes: McCabe making progress - The Courier-Journal - February 11th, 2017 [February 11th, 2017]
- Jeremy Lin: Progress but no timetable - NetsDaily - February 11th, 2017 [February 11th, 2017]
- Marginal progress for Turkish-backed forces in north Syria - LA Daily News - February 11th, 2017 [February 11th, 2017]
- Jimmy Cheek: UT chancellor appreciative of hard work, progress on journey - Knoxville News Sentinel - February 12th, 2017 [February 12th, 2017]
- Syria Regional Crisis 2016 Emergency Appeal - Progress Report - Reliefweb - February 12th, 2017 [February 12th, 2017]
- CWLP officials: Bailout repayment would set back progress - The State Journal-Register - February 12th, 2017 [February 12th, 2017]
- Pistons' Johnson making halting but definite progress - The Detroit News - February 12th, 2017 [February 12th, 2017]
- Clairton works: Real progress is coming to the former steel town - Pittsburgh Post-Gazette - February 12th, 2017 [February 12th, 2017]
- The Democrats' Strategy: Hindering Progress For Partisan Politics - Daily Caller - February 13th, 2017 [February 13th, 2017]
- The surprising progress stoppers on the Dallas Cowboys defensive line - Cowboys Wire - February 13th, 2017 [February 13th, 2017]
- Gender Progress in Ballet - Huffington Post - February 13th, 2017 [February 13th, 2017]
- Foyt pleased with progress, regrets lack of time - Motorsport.com, Edition: Global - February 13th, 2017 [February 13th, 2017]
- Progress Made, but Threat Lingers at California's Oroville Dam - Wall Street Journal - February 13th, 2017 [February 13th, 2017]
- Adele, Beyonc, and the Grammys' Fear of Progress - The Atlantic - February 13th, 2017 [February 13th, 2017]
- North Korea Claims Progress on Long-Range Goal With Missile Test - New York Times - February 13th, 2017 [February 13th, 2017]
- How Travel Bans Can Impede America's Progress - Forbes - Forbes - February 13th, 2017 [February 13th, 2017]
- Jeff Sessions' appointment threatens decades of civil rights progress - The Hill (blog) - February 14th, 2017 [February 14th, 2017]
- Ionis Earns $75M Milestone from Bayer for Progress of Antisense Drug Program - Genetic Engineering & Biotechnology News (press release) - February 14th, 2017 [February 14th, 2017]
- Guilford Schools annual report shows mixed results on progress - Greensboro News & Record (blog) - February 14th, 2017 [February 14th, 2017]
- Sniper Elite 4 review in progress - PC Gamer - February 14th, 2017 [February 14th, 2017]
- For Honor Review In Progress - GameSpot - February 14th, 2017 [February 14th, 2017]
- China's military progress challenges Western dominance, says IISS - Deutsche Welle - February 15th, 2017 [February 15th, 2017]
- PFW in Progress Recap 2/14: Patriots Offseason Outlook | New ... - Patriots.com - February 15th, 2017 [February 15th, 2017]
- Daily Progress, chamber establish regional business Hall of Fame - The Daily Progress - February 15th, 2017 [February 15th, 2017]
- Huntsville-based Progress Bank to acquire Birmingham's First Partners Bank - Birmingham Business Journal - February 15th, 2017 [February 15th, 2017]
- City, UF sign partnership for progress - Gainesville Sun - February 15th, 2017 [February 15th, 2017]
- California officials lift evacuation order for 200000 threatened by damaged dam - CBS News - February 15th, 2017 [February 15th, 2017]
- 5G progress at Ericsson could help enterprises work worldwide - Computerworld - February 16th, 2017 [February 16th, 2017]
- Officials making 'great progress' on California dam repairs, remind residents to stay vigilant - Fox News - February 16th, 2017 [February 16th, 2017]
- Halo Wars 2 Review in Progress - IGN - February 16th, 2017 [February 16th, 2017]
- CUGNON: Forward progress - Yale Daily News (blog) - February 16th, 2017 [February 16th, 2017]
- F-35 Program Makes Significant, Solid Progress, Official Says - Department of Defense - February 16th, 2017 [February 16th, 2017]
- Lenovo's data center ambitions remain work in progress following Q3 results - ZDNet - February 16th, 2017 [February 16th, 2017]
- PFW in Progress Recap 2/16: Free Agency and Potential Patriots - Patriots.com - February 16th, 2017 [February 16th, 2017]
- S&P 500: 'Blow-off' Phase in Progress - DailyFX - February 16th, 2017 [February 16th, 2017]
- Combine invites are another sign of progress at Michigan - Big Ten ... - ESPN (blog) - February 16th, 2017 [February 16th, 2017]
- Halo Wars 2 review in progress - PC Gamer - February 17th, 2017 [February 17th, 2017]
- 'Hero' film produced just for Charlottesville featured the mayor, The Daily Progress - The Daily Progress - February 17th, 2017 [February 17th, 2017]
- Republicans' health care overhaul still a work in progress - Press Herald - February 17th, 2017 [February 17th, 2017]
- Trump Boasts Of 'Incredible Progress' In 4 Weeks Of Presidency - NPR - February 17th, 2017 [February 17th, 2017]
- Donald Trump touts promise progress at press conference - PolitiFact - February 17th, 2017 [February 17th, 2017]
- Mild winter helping crews make significant progress on East End Connector - WRAL.com - February 18th, 2017 [February 18th, 2017]
- Committee updates Legislature on precinct consolidation progress - Chicago Tribune - February 18th, 2017 [February 18th, 2017]