EPAM Stock Study (5-10-24)

Posted by Mark on May 29, 2024 at 07:22 | Last modified: May 10, 2024 10:13

I recently did a stock study on EPAM Systems Inc. (EPAM) with a closing price of $181.93. The previous study is here.

M* writes:

     > EPAM Systems is a global IT services firm that offers
     > platform engineering, software development, and consulting
     > services. EPAM’s largest market is North America, which
     > represents approximately 60% of revenues. Offerings span
     > assisting companies with new technologies, such as
     > artificial intelligence, virtual reality, and robotics.

The stock fell ~27% on May 9 after lower revenue and EPS guidance. I expect analyst estimates will be modified accordingly over the next week(s), but I wanted to do an immediate First Cut to see how it looks through my conservative lenses.

Over the past 10 years, this medium-size company has grown sales and EPS at annualized rates of 24.6% and 24.9%, respectively. Lines are mostly up, straight, and parallel except for a sales dip in ’23 and EPS dips in ’17, ’22, and ’23.

Over the past decade, PTPM appears to be above peer averages (website not displaying peer or industry lines) while ranging from 10.5% in ’22 to 14.2% in ’20 and ’21 with a last-5-year mean of 12.7%. ROE also appears to lead peer averages while ranging from 7.1% in ’17 to 19.8% in ’21 with a last-5-year mean of 16.1%. Debt-to-Capital appears well below peer averages with a last-5-year mean of 9.1%.

EPAM has a Quick Ratio of 4.5, 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. M* gives a “Standard” rating for Capital Allocation and categorizes the company with a “Narrow” economic moat.

With regard to sales growth:

• YF projects YOY 2.6% and 13.4% growth for ’24 and ’25, respectively (based on 21 analysts).
• Zacks projects YOY 2.3% and 11.5% for ’24 and ’25, respectively (11 analysts).
• Value Line projects 6.5% annualized growth from ’23-’28.
• CFRA projects 3.1% YOY and 7.5% per year for ’24 and ’23-’25.
• M* projects 5-year annualized growth of 6.0% in its analyst note.

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

With regard to EPS growth:

• MarketWatch projects annualized growth of 8.0% and 10.5% for ’23-’25 and ’23-’26 (based on 23 analysts).
• Nasdaq.com projects 9.0% YOY and 11.5% per year for ’25 and ’24-’26 (9/9/3 analysts for ’24/’25/’26).
• Seeking Alpha projects 4-year annualized growth of 17.6%.
• YF projects YOY 3.9% contraction and 16.4% growth for ’24 and ’25, respectively (20), along with 5-year annualized growth of 7.1%.
• Zacks projects YOY 3.9% contraction and 15.2% growth for ’24 and ’25, respectively (14), along with 5-year annualized growth of 3.0%.
• Value Line projects 17.0% annualized growth from ’23-’28.
• CFRA projects 3.4% YOY contraction and 7.6% growth per year for ’24 and ’23-’25 along with a 3-year CAGR of 4.0%.

My 3.0% forecast is at the bottom of the [very large] long-term range. Mean (n = 4) is currently 11.2%, but I expect Value Line and Seeking Alpha to decrease. Initial value is ’23 EPS of $7.06/share.

My Forecast High P/E is 33.0. Over the past decade, high P/E ranges from 34.0 in ’18 to 95.3 in ’22 with a last-5-year mean of 70.3 and a last-5-year-mean average P/E of 47.1. I am below the range.

My Forecast Low P/E is 20.0. Over the past decade, low P/E ranges from 21.0 in ’14 to 48.0 in ’17 with a last-5-year mean of 28.8 (last-10-year median 27.5). I am below the range.

My Low Stock Price Forecast (LSPF) of $141.20 is default based on the initial value. This is 22.4% less than the previous close and 21.7% less than the 52-week low.

These inputs land EPAM in the HOLD zone with a U/D ratio of 2.2. Total Annualized Return (TAR) is 8.2%.

PAR (using Forecast Average—not High—P/E) is 3.6%, 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 TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 26 [nine months ago this number was 152] studies done in the past 90 days (my study and 8 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 10.0%, 9.3%, 42.0, and 26.6, respectively. I am lower across the board. Value Line projects a future average annual P/E of 23.0, which is much lower than MS (34.3) and lower than mine (26.5).

MS high / low EPS are $11.37 / $7.07 versus my $8.18 / $7.06 (per share). My high EPS is lower due to a lower growth rate. Value Line has high EPS at $15.50: much higher than both. As mentioned, I expect this to come down.

MS LSPF of $185.00 (INVALID) implies a Forecast Low P/E of 26.2 vs. the above-stated 26.6. MS LSPF is 1.6% less than the default $7.07/share x 26.6 = $188.06 (also INVALID), which results in more conservative zoning. MS LSPF is 31.0% greater than mine, however.

TAR (over 15.0% preferred) is much less than MS 13.2%. Despite the small MS sample size, I think I did a pretty good job of using conservative judgments. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 6.0 and 8.3 per Zacks and my projected P/E: both significantly overvalued due to low growth-rate denominators. Relative Value [(current P/E) / 5-year-mean average P/E] is cheap at 0.52.

As mentioned at the top, it will take some time for analysts to digest the earnings announcement and modify estimates. After such a sharp selloff, though, I wanted to see if we might have a screaming BUY right now. M* maintains an updated 4-star rating while Value Line and CFRA updates will be forthcoming. I certainly don’t hear any screaming. In fact, I’m not sure I hear anything at all.

EPAM is a BUY under $173/share. With a forecast high price ~$270, my personal TAR criterion won’t be satisfied until ~$135.