EPAM Systems (EPAM)'s Hidden Bargain: An In-Depth Look at the 25% Margin of Safety Based on its ...
EPAM Systems Inc (NYSE:EPAM) has seen a daily loss of -4.49%, and a 3-month gain of 6.14%. With an Earnings Per Share (EPS) of 9, this raises the question: is the stock significantly undervalued? This article aims to provide a comprehensive valuation analysis to answer this question. Read on to find out more.
Introduction to EPAM Systems
EPAM Systems Inc provides software product development and digital platform engineering services to clients globally. The company's services include Software Product Development, Custom Application Development, Application Testing, Enterprise Application Platforms, Application Maintenance, and Support, and Infrastructure Management. EPAM Systems focuses on innovative and scalable software solutions, using industry-standard and custom-developed technology, tools, and platforms to deliver results to handle business challenges. The majority of its revenue is generated from North American clients.
The company's stock price currently stands at $240.52, while the GF Value, an estimation of fair value, is $604.83. This comparison sets the stage for a deeper exploration of the company's value, ingeniously integrating financial assessment with essential company details.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. It is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
EPAM Systems (NYSE:EPAM) is estimated to be significantly undervalued based on GuruFocus' valuation method. The stock's fair value is based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $ 240.52 per share, EPAM Systems stock is estimated to be significantly undervalued.
Because EPAM Systems is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
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Financial Strength of EPAM Systems
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this, an investor must review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. EPAM Systems has a cash-to-debt ratio of 10.22, which ranks better than 66.04% of 2721 companies in the Software industry. The overall financial strength of EPAM Systems is 8 out of 10, indicating that the financial strength of EPAM Systems is strong.
Profitability and Growth of EPAM Systems
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. EPAM Systems has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $4.80 billion and Earnings Per Share (EPS) of $9. Its operating margin of 12.72% is better than 78.01% of 2756 companies in the Software industry. Overall, GuruFocus ranks EPAM Systems's profitability as strong.
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. EPAM Systems's 3-year average revenue growth rate is better than 82.56% of 2397 companies in the Software industry. EPAM Systems's 3-year average EBITDA growth rate is 19.8%, which ranks better than 67.05% of 1988 companies in the Software industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, EPAM Systems's return on invested capital is 24.03, and its cost of capital is 13.57.
Conclusion
In conclusion, the stock of EPAM Systems (NYSE:EPAM) is estimated to be significantly undervalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 67.05% of 1988 companies in the Software industry. To learn more about EPAM Systems stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
