EPAM Stock Study (8-2-23)

I recently did a stock study on EPAM Systems Inc. (EPAM) with a closing price of $239.48.

M* writes:

     > EPAM Systems Inc provides software product development and digital
     > platform engineering services to clients located around the world.
     > The company services include Software Product Development, Custom
     > Application Development, Application Testing, Enterprise Application
     > Platforms, Application Maintenance, and Support and Infrastructure
     > Management. The company focuses on innovative and scalable software
     > solutions. The company uses industry standard and custom developed
     > technology, tools, and platforms to deliver results to handle
     > business challenges. The company primarily offers its solutions in
     > the following industries: financial services, travel and consumer,
     > software and hi-tech, life sciences and healthcare. The majority
     > of revenue is generated from North American clients.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 26.3% and 25.7%, respectively. Lines are mostly up, straight, and parallel except for EPS dips in ’17 and ’22. PTPM is above peer and industry averages despite trending down from 13.8% in ’13 to 10.5% in ’22 with a last-5-year mean of 13.1%.

Also over the past decade, ROE slightly leads peer averages while trailing the industry by falling from 17.0% in ’13 to 14.8% in ’22 with a last-5-year mean of 17.5%. Debt-to-Capital is well below peer/industry averages with a last-5-year mean of 8.5%.

EPAM has a Quick Ratio of 4.02, which is one of the highest I have ever seen. All debt is long-term with no interest due [leases perhaps?]. I’m surprised to see Value Line only give a B++ grade for Financial Strength.

With regard to sales growth:

• CNN Business projects 2.1% YOY contraction and 3.1% growth per year for ’23 and ’22-’24 (based on 14 analysts).
• YF projects YOY 2.6% contraction and 8.3% growth for ’23 and ’24, respectively (17 analysts).
• Zacks projects YOY 2.8% contraction and 6.3% growth for ’23 and ’24, respectively (9).
• Value Line projects 7.7% annualized growth from ’22-’27.
• CFRA projects 1.7% YOY contraction and 5.0% growth per year for ’23 and ’22-’24.

I am forecasting toward the lower end of the range at 2.0% per year.

With regard to EPS growth:

• CNN Business reports ACE of 9.1% YOY contraction and 0.5% growth per year for ’23 and ’22-’24, respectively (based on 14 analysts), along with 5-year annualized growth of 4.4%.
• MarketWatch projects annualized growth of 1.8% and 7.7% for ’22-’24 and ’22-’25, respectively (18 analysts).
• Nasdaq.com projects growth of 7.1% YOY and 15.3%/year for ’24 and ’23-’25 (10 analysts for ’23/’24 and 4 for ’25).
• Seeking Alpha projects 4-year annualized growth of 4.4%.
• YF projects YOY 9.0% contraction and 11.2% growth for ’23 and ’24, respectively (15), along with 5-year annualized growth of 6.3%.
• Zacks projects YOY 9.2% contraction and 8.5% growth for ’23 and ’24, respectively (11), along with 5-year annualized growth of 4.4%.
• Value Line projects 6.7% growth per year from ’22-’27.
• CFRA projects 8.4% YOY contraction and 3.2% growth per year for ’23 and ’22-’24 along with a 3-year CAGR of 10.0%.

Three long-term estimates of 4.4% makes me suspicious of data duplication: different sources using estimates from the same analyst(s). Knowing this might weaken my confidence and cause me to decrease my forecast even further. As it is, I am forecasting below the long-term-estimate range (mean of five: 5.2%) at 4.0% per year. I will use ’22 EPS of $7.09/share as the initial value rather than 2023 Q1 EPS of $7.29 (annualized).

My Forecast High P/E is 40.0. Over the past decade, high P/E has trended up from 31.1 in ’13 to 95.3 in ’22 with a last-5-year mean of 66.1. The last-5-year-mean average P/E is 47.1. I am below the latter [’13, ’18 (34.0) and ’14 (37.8) are lower].

My Forecast Low P/E is 25.0. Over the past decade, low P/E has ranged from 14.4 in ’13 to 48.0 in ’17 with a last-5-year mean of 28.0 (median 25.9). I am forecasting below the latter.

My Low Stock Price Forecast (LSPF) of $177.30 is default based on the initial value of $7.09/share. This is 26.0% less than the previous close and 10.5% less than the 52-week low.

These inputs land EPAM in the HOLD zone with a U/D ratio of 1.8. Total Annualized Return (TAR) is 7.8%.

PAR (using Forecast Average—not High—P/E) is 3.4%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the 7.8% total annualized return (TAR) instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 152 studies done in the past 90 days (my study and 38 other outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 16.6%, 15.2%, 41.0, and 26.1, respectively. I am lower across the board. Value Line projects a future average annual P/E of 40.0, which is higher than MS (33.6) and higher than me (32.5).

MS high / low EPS are $14.73 / $6.66 vs. my $8.63 / $7.09 (per share). I really do not understand why MS growth rates are so high unless analyst estimates have been recently slashed. As mentioned above, I see three at 4.4% with the highest at 6.7% (based on the statistical array, the 20.5% EPS growth shown in Value Line’s left-margin table no longer applies). MS averages 15.2%. I am tempted to argue the latter as unreasonably high.

MS LSPF of $177.80 implies a Forecast Low P/E of 26.7 vs. the above-stated 26.1. MS LSPF is 12.2% less than the default $6.66/share * 26.1 = $173.83, which results in slightly more aggressive zoning. MS LSPF is about equal to mine.

My TAR (over 15.0% preferred) is much less than MS 21.5%.

MOS backing the current study seems robust.

I track a few different valuation metrics. PEG is significantly overvalued at 5.5 per Zacks and 7.8 per my projected [forward] P/E. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is undervalued at 0.69. Kim Butcher’s “quick and dirty DCF” prices the stock at 33.0 * [$12.00 – ($0.00 + $2.05)] = $328.35 thereby implying the stock to be 27.0% undervalued.

I would look to re-evaluate EPAM under $219/share in hopes of qualifying TAR.