INFY Stock Study (5-17-24)

Posted by Mark on June 12, 2024 at 07:03 | Last modified: May 17, 2024 09:42

I recently did a stock study on Infosys Ltd ADR (INFY) with a closing price of $17.24.

M* writes:

     > Infosys is a leading global IT services provider, with nearly 250,000
     > employees. Based in Bangalore, the Indian IT services firm leverages
     > its offshore outsourcing model to derive 60% of its revenue from North
     > America. The company offers traditional IT services offerings:
     > consulting, managed services and cloud infrastructure services,
     > and business process outsourcing as a service.

Over the last 10 years, this large-size company has grown sales and earnings at annualized rates of 9.1% and 6.6%, respectively. Lines are mostly up, straight, and parallel except for an EPS dip in ’18 (FY ends Mar 31; any FY references to BI website or Value Line are incremented by one). EPS R^2 is 0.94.

Over the past decade, PTPM leads industry and peer averages despite trending down from 32.3% (’15) to 23.4% (’24) with a last-5-year mean of 24.3%. ROE leads industry averages but slightly trails peers despite increasing from 24.2% (’15) to 32.7% (’24) with a last-5-year mean of 30.5%. Debt-to-Capital is much lower than peer and industry averages since the company has no long term debt (last-5-year mean 7.7%).

Quick Ratio is 1.7. Value Line gives an A+ rating for Financial Strength. M* gives a “Standard” rating for Capital Allocation and assigns a “Narrow” economic moat to the company.

With regard to sales growth:

• YF projects YOY 2.9% and 6.1% for ’25 and ’26, respectively (based on 12 analysts).
• Zacks projects YOY 2.0% and 7.0% for ’25 and ’26, respectively (5 analysts).
• Value Line projects 2.1% per year for ’24-’29.
• CFRA projects 5.0% YOY and 7.6% per year for ’25 and ’24-’26, respectively.
• M* gives a 2-year annualized ACE of 6.2% and projects 7.0% per year over next five years in its analyst report.

I am forecasting below the range at 2.0% per year.

With regard to EPS growth:

• MarketWatch projects 8.8% and 9.0% per year for ’24-’26 and ’24-’27, respectively (based on 50 analysts).
• Nasdaq.com projects 8.0% YOY and 10.2% per year for ’26 and ’25-’27 (8, 8, and 2 analysts for ’25, ’26, and ’27).
• Seeking Alpha projects 4-year annualized growth of 10.0%.
• YF projects YOY 1.3% contraction (’25) and 9.3% growth (’26) along with 5-year annualized growth of 14.8% (11).
• Zacks projects YOY 1.3% contraction (’25) and 8.0% growth (’26) along with 5-year annualized growth of 10.0% (8).
• Value Line projects annualized growth of 10.5% from ’24-’29.
• CFRA projects growth of 23.4% YOY and 17.3% per year for ’25 and ’24-’26 [EPS matrix displays $0.38 for most recent completed year despite four quarters summing to $0.64. I use the latter even though M* and Value Line both state $0.76], respectively, along with a 3-year CAGR of 10.0%.
• M* provides an annualized long-term ACE of 8.5%.

My 8.0% forecast is below the long-term-estimate range (mean of five: 10.8%). Initial value is ’24 EPS of $0.76/share.

My Forecast High P/E is 21.0. Over the past decade, high P/E increases from 21.2 (’15) to 27.3 (’24) with a last-5-year mean of 30.7 and a last-5-year-mean average P/E of 24.5. I am near the bottom of the range [only ’18 (17.0), which appears to be a (potentially TCJA) outlier, is lower].

My Forecast Low P/E is 14.0. Over the past decade, low P/E ranges from 12.2 in ’21 to 24.6 in ’22 with a last-5-year mean of 18.3. I am forecasting just below the 7-year median (14.2) from ’15-’21 (’22-’24 range is 19.4 – 24.6).

My Low Stock Price Forecast (LSPF) is $12.00. The default value ($10.60) seems unreasonably low as a 38.5% discount to previous close. $12.00 is a 30.4% discount and 20.0% less than the 52-week low.

The lowest Payout Ratio (PR) over the past decade is 33.4% in ’15 and the last-5-year mean is 53.2%. I am forecasting below the range at 33.0%.

These inputs land INFY in the HOLD zone with a U/D ratio of 1.8. Total Annualized Return (TAR) is 9.7%.

PAR (using Forecast Average—not High—P/E) of 4.5% 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 TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 56 studies done in the past 90 days (my study and 12 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 5.7%, 9.0%, 26.0, 16.1, and 53.6%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 22.0 that is higher than MS (21.1) and higher than mine (17.5).

MS high / low EPS are $1.14 / $0.74 versus my $1.12 / $0.76 (per share). Range midpoint is identical. Value Line’s high EPS of $1.25 is higher than both.

MS LSPF of $13.60 implies a Forecast Low P/E of 18.4 versus the above-stated 16.1. MS LSPF is 14.2% greater than the default $0.74/share * 16.1 = $11.91, which results in more aggressive zoning. MS LSPF is also 13.3% greater than mine.

TAR (over 15.0% preferred) is less than MS 13.6%. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 2.3 and 2.6 per Zacks and my projected P/E: both somewhat overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is fairly valued at 0.93.

I think the pivotal detail for this stock study is whether future P/E will remain elevated like the last three years or return to the range of ’15-’21. High P/E spikes in ’20 and both high and low P/E are elevated by ’21. Both turn lower in ’22 and ’23 to create disparate ranges between the first seven years and last three.

INFY is a BUY under $14.90/share. With a forecast high price of $23.60, my personal TAR criterion will be met at $13.30 (perhaps a few cents higher as forecasting PR below the range rather than at the 5-year median trims TAR by 1.0%).