Goldman Downgrades Evertec, Says Puerto Rico's Hurricane Recovery Will Hurt Prospects

Street estimates for Evertec Inc EVTC, which operates full-service transaction processing in Latin America and the Caribbean, may not be reflect the company's risks, according to Goldman Sachs. 

The Analyst

Goldman Sachs analyst James Schneider downgraded Evertec from Neutral to Sell and lowered the price target from $15 to $12.

The Thesis

The ongoing economic weakness in Puerto Rico in the aftermath of Hurricane Maria is not reflected in Street estimates, analyst Schneider said in a Wednesday note. (See Schneider's track record here.) 

Puerto Rico accounts for 85 percent of Evertec's revenues, the analyst said.

Goldman Sachs expects the stock to underperform as prolonged hurricane recovery efforts and the resultant migration from Puerto Rico offset any potential medium-term economic recovery. Schneider estimates revenue growth will remain in the low-single-digit range as opposed to the historical mid-single-digit range.

"We believe the company's financial outlook and flexibility will ultimately be constrained by prior cost-cutting initiatives (which limit potential restructuring-driven margin improvement) and capital constraints (which limit M&A optionality)," Schneider said.

Goldman Sachs' 2018 revenue and earnings per share forecasts are 6 percent and 15 percent below the Street estimates, respectively.

The following factors would lead Goldman Sachs to become more constructive, Schneider said: 

• Population migration from Puerto Rico is less severe than anticipated. 
• Recovery efforts proceed at a faster-than-expected pace.
• Puerto Rico announces economic stimulus.
• The company implements stronger cost controls.

The Price Action

Evertec shares are down over 20 percent over the past year.

Shares closed down 1.74 percent at $14.15 on Wednesday. 

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Hurricane Maria damage in Puerto Rico. Photo courtesy of U.S. Customs and Border Protection via Wikimedia.