UPDATE: Barrington Research Initiates Coverage On Providence Service

Analysts at Barrington Research on Monday initiated coverage of The Providence Service Corporation (NASDAQ: PRSC) by issuing an Outperform rating on the stock and setting a price target of $49. Providence provides home and community-based social service transportation for children.

The Numbers

Barrington analyst Michael Petusky expects that the human services segment will see margin improvements in upcoming years, and Barrington is projecting strong top-line growth for Providence. Petusky explains in detail where the $49 target came from.

“We arrive at our price target by attaching an 8x multiple to our 2015 EBITDA estimate and a 7.3x multiple to our 2016 EBITDA expectation.”

Putting Skin In The Game

In late November, Providence CFO Robert Wilson purchased $276,450 of the company’s stock at a price of $36.86. Insider buying is not a perfectly reliable indication of future stock price, but it is reassuring to Providence shareholders to see that management is confident in the future.

Major Upside

Providence stock was up 2 percent on the news and traded recently at $36.37. The $49 price target represents a 33.5 percent upside for the stock from current levels. Providence stock has already had an exceptional 2014, up 41 percent year-to-date.

A Valuation Perspective

Providence’s current price-to-earnings (P/E) ratio of 32.5 may seem high, but the rapid earnings growth that is projected for the company brings down its forward P/E to a reasonable 15.1. The company’s debt-to-equity ratio of 1.1 is not ideal, but high debt levels can be typical of expanding companies. Providences projected annual earnings growth rate over the next five years is an impressive 15 percent.