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On Tuesday, Jefferies analysts lowered their rating on Adecco Group AG (ADEN:SW) (OTC: OTC:AHEXY) shares from Hold to Underperform, significantly reducing the price target to CHF19.50 from CHF29.00. The $4 billion market cap staffing company, which currently trades at a P/E ratio of 13x, is showing signs of undervaluation according to InvestingPro analysis. The revision by the investment firm comes amidst concerns regarding the staffing company's balance sheet, particularly the leverage ratio, which is approximately three times. With a debt-to-equity ratio of 1.11 and annual revenue of $26 billion, Jefferies highlighted the potential underestimation of dividend risk by the market and suggested that eliminating the dividend for two years could be a strategic move to address the leverage issue within a three-year period. Notably, InvestingPro data shows the company has maintained dividend payments for 29 consecutive years.
Jefferies analysts pointed to the earnings momentum of Adecco (SIX:ADEN), which is expected to lag behind its main competitor this year. They also indicated that further downward revisions of earnings forecasts might be necessary, as their estimates are already 5-7% below the consensus.
The downgrade reflects Jefferies' analysis of the financial health and performance prospects of Adecco. The firm's analysts have expressed concern that the high leverage ratio could impact the company's ability to maintain its dividend payments. They believe that taking decisive action to cut the dividend could help realign the company's financial structure more sustainably.
The staffing industry, where Adecco operates, is facing various challenges, and the company's performance is seen as not matching up to its peers. This situation is exacerbated by the potential need for more conservative earnings expectations than what the broader market currently anticipates. InvestingPro reveals several additional insights about Adecco's financial health and market position, with 8 more exclusive ProTips available to subscribers, along with comprehensive valuation metrics and peer comparison tools in the Pro Research Report.
Adecco's stock price is likely to be influenced by Jefferies' downgrade and the new price target, as investors digest the implications of the firm's leverage concerns and the possibility of dividend cuts. The market will be watching closely for any further developments or announcements from Adecco regarding its financial strategy and dividend policy in response to these concerns.
In other recent news, Adecco Group AG has announced a decrease in Q3 2024 revenues, which fell to €5.7 billion. This represents a 5% decrease on an organic trading days-adjusted basis and a 3% decline on an organic basis compared to the previous year. The company's EBITA was reported at €186 million, with a margin of 3.3%, while both adjusted and basic earnings per share saw a 3% year-on-year decrease. Adecco's net debt stands at €2,925 million, reflecting a net debt-to-EBITDA ratio of 3.1 times.
The human resources firm anticipates that Q4 revenues, gross margin, and SG&A expenses will align with Q3 levels. Despite the challenging market environment, Adecco continues to advance its GenAI capabilities and form strategic partnerships with Salesforce (NYSE:CRM) and Microsoft (NASDAQ:MSFT), as part of its "Simplify, Execute, and Grow" agenda.
In terms of geographical performance, the Americas experienced a 6% revenue drop, with North America specifically down by 15%. However, Adecco Italy secured a talent provision contract in the luxury goods sector, indicating potential for future expansion. The company remains committed to maintaining cost discipline and enhancing operational efficiency through AI adoption.
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