TriNet's Risk-Reward Is Balanced, Morgan Stanley Says In Upgrade

The downside potential from insurance margins is limited for TriNet Group Inc TNET, while the valuation of the shares is more reflective of lagging work site employee growth near term, according to Morgan Stanley. 

The Analyst

Analyst Vasundhara Govil upgraded TriNet from Underweight to Equal-weight and increased the price target from $32 to $46.

The Thesis

TriNet's net insurance margin outperformance appears to be more sustainable than anticipated in light of workers comp repricing and the potential for continued administrative cost savings, Govil said in a Wednesday note. The analyst estimates 12.2-percent net insurance margins in 2018 compared to a prior target of 10.5 percent.

Morgan Stanley's 2019 and 2020 margin forecasts suggest a $50-$80-million annual improvement in net insurance revenues and a 300-500 basis point increase in EBITDA margins, the analyst said. 

The underperformance of WSE over the past six quarters is due largely to attrition stemming from the SOI platform migration, and it's likely to continue for another two quarters, Govil said. 

The stock valuation's has normalized significantly to factor in this risk, the analyst said. 

"Beyond 2018, we believe resumption in sales rep growth (low single digit growth in 2017, by our estimate) and improvement in sales rep productivity should position TNET to return to near industry growth levels by 2019." 

Morgan Stanley could turn more constructive on TriNet in the interim if WSE growth recovers faster than expected, margin expansion becomes sustainable and accretive M&A materializes, Govil said. The firm raised its 2018 revenue estimate by 4 percent and the earnings per share estimate by 81 cents.

The Price Action

TriNet shares are up about 61 percent over the past year.

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