G Stock Study (5-21-24)

Posted by Mark on June 20, 2024 at 06:55 | Last modified: May 21, 2024 11:27

I recently did a stock study on Genpact Ltd. (G) with a closing price of $37.18. Previous studies are here and here.

M* writes:

     > Genpact Ltd is a provider of business process management
     > services. Clients are industry verticals and operate in banking and
     > financial services, insurance, capital markets, consumer product
     > goods, life sciences, infrastructure, manufacturing and services,
     > healthcare, and high-tech. Genpact’s services include aftermarket,
     > procurement, risk and compliance, human resources, IT, industrial
     > direct solutions, collections, finance and accounting, and media
     > services. Genpact’s end market by revenue is India. The company
     > is a General Electric spin-off, which is still a large source of
     > revenue for Genpact.

Over the last 10 years, this medium-size company has grown sales and EPS at annualized rates of 8.5% and 12.1%, respectively. Lines are up, straight, and parallel except for an EPS dip in ’22.

Over the past decade, PTPM leads peer and industry averages while ranging from 10.8% in ’20 to 13.5% in ’23 with a last-5-year mean of 11.6%. ROE slightly trails the industry while beating peer averages by ranging from 14.9% (’14) to 30.8% (’23) with a last-5-year mean of 20.8%. Debt-to-Capital is lower than industry averages and higher than peers in climbing from 38.2% (’14) to 40.1% (’23) with a last-5-year mean of 48.7%.

Quick Ratio is 1.4 and Interest Coverage is 10.1. Value Line rates the company “A” for Financial Strength and CFRA describes the balance sheet as “clean, with a low net debt-to-EBITDA ratio of 0.9x on a TTM basis.”

With regard to sales growth:

• YF projects YOY 3.0% and 6.1% for ’24 and ’25, respectively (based on 11 analysts).
• Zacks projects YOY 2.6% and 6.4% for ’24 and ’25, respectively (6 analysts).
• Value Line projects 5.4% annualized growth from ’23-’28.
• CFRA projects 3.5% YOY and 4.2% per year for ’24 and ’23-’25, respectively.

I am forecasting toward the lower end of the range at 3.0% per year.

With regard to EPS growth:

• MarketWatch projects 6.9% and 7.6% per year for ’23-’25 and ’23-’26, respectively (based on 13 analysts).
• Nasdaq.com projects 9.3% YOY and 10.6% per year for ’25 and ’24-’26 (3, 7, and 4 analysts for ’24, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 8.0%.
• YF projects YOY 2.0% and 8.9% for ’24 and ’25, respectively (11), along with 5-year annualized growth of 3.2%.
• Zacks projects YOY 1.3% and 9.6% for ’24 and ’25, respectively (8), along with 5-year annualized growth of 7.9%.
• Value Line projects 8.4% annualized growth from ’23-’28.
• CFRA projects 1.3% YOY and 3.9% per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 6.0%.

My 3.0% forecast is below the long-term-estimate range (mean of four: 6.9%). The initial value is ’23 EPS of $3.41/share rather than 2024 Q1 EPS of $3.50 (annualized). While the forecast may seem low, initial value is 81.4% greater than the previous year. I typically expect some mean reversion when I see such dramatic changes.

My Forecast High P/E is 14.0. Over the past decade, high P/E increases from 22.8 (’14) to 28.7 (’22) before tanking to 14.2 in ’23. The last-5-year mean is 25.7 and the last-5-year-mean average P/E is 21.0. I am forecasting below the range.

My Forecast Low P/E is 8.0. Over the past decade, low P/E increases from 16.1 (’14) to 20.0 (’21/’22; temporary COVID disruption in ’20 of 12.4) before tanking to 8.6 in ’23 with a last-5-year mean of 16.4. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $27.30 is default based on the initial value. This is 20.5% less than the previous closing price and 7.1% less than the 52-week low.

Since dividend payments begin in 2017, the lowest Payout Ratio (PR) is 16.1% in ’23 with a last-5-year mean of 22.4%. I am forecasting below the range at 16.0%.

These inputs land G in the HOLD zone with a U/D ratio of 3.0. Total Annualized Return (TAR) is 11.1%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a medium-size company at 6.3%. 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 87 studies done in the past 90 days (my study and 20 other 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 6.0%, 6.7%, 20.4, 13.3, and 22.4%, respectively. I am lower across the board. Value Line projects a future average annual P/E of 16.0 that is less than MS (16.9) and much greater than mine (11.0).

MS high / low EPS are $4.33 / $2.96 versus my $3.95 / $3.41 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $4.10 is in the middle.

MS LSPF of $28.10 implies a Forecast Low P/E of 9.5 versus the above-stated 13.3. MS LSPF is 28.6% less than the default $2.96/share * 13.3 = $39.37: quite a big discrepancy! MS LSPF is still 2.9% greater than mine, however.

TAR (over 15.0% preferred) is much less than MS 22.5% (another big discrepancy). Especially given my conservative judgments, I believe MOS to be robust in the current study.

Big discrepancies are also seen with regard to valuation. PEG is 1.4 and 3.2 per Zacks and my projected P/E: the latter significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is extremely cheap at 0.47.

The P/E compression in 2023 makes for a very interesting stock study. EPS spikes but stock price does not follow. The difference between P/E remaining at ’23 levels or returning to historical levels is the TAR difference between MS and the current study: all highly discrepant.

G is a BUY under $34/share. With a forecast high price ~$55, my personal TAR criterion is satisfied ~$27.50.

In reading the Apr 2024 BI Magazine, I realize “my personal TAR criterion” stems from BI. As discussed in Daniel Boyle’s “Repair Shop” article:

     > BetterInvesting teaches us to focus on companies that can consistently grow their
     > earnings at least 15% per year so that if valuation, as measured by the P/E ratio,
     > doesn’t change the stock is expected to double over five years.