Is EPAM Systems (EPAM) Significantly Undervalued? A Comprehensive Analysis
EPAM Systems Inc (NYSE:EPAM) displayed a notable gain of 7.36% recently, with an Earnings Per Share (EPS) (EPS) of 7.29. This article aims to answer a crucial question: is the stock significantly undervalued? Our valuation analysis, which you're encouraged to read, suggests that it might be.
Company Introduction
EPAM Systems Inc provides a range of software product development and digital platform engineering services to clients worldwide. Its services include Software Product Development, Custom Application Development, Application Testing, Enterprise Application Platforms, Application Maintenance, Support, and Infrastructure Management. The company primarily offers its solutions in industries such as financial services, travel and consumer, software and hi-tech, life sciences and healthcare, with the majority of its revenue generated from North American clients.
At its current price of $254.33 per share, EPAM Systems has a market cap of $14.7 billion. When compared to the GuruFocus Fair Value (GF Value) of $624.8, the stock appears to be significantly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
EPAM Systems (NYSE:EPAM) stock appears to be significantly undervalued based on the GuruFocus Value calculation. At its current price of $254.33 per share, EPAM Systems has a market cap of $14.7 billion and the stock appears 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
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. EPAM Systems has a cash-to-debt ratio of 9.67, which is better than 65.25% of companies in the Software industry. GuruFocus ranks the overall financial strength of EPAM Systems at 8 out of 10, which indicates that the financial strength of EPAM Systems is strong.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. EPAM Systems has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.9 billion and Earnings Per Share (EPS) of $7.29. Its operating margin is 11.6%, which ranks better than 76.14% of companies in the Software industry. Overall, the profitability of EPAM Systems is ranked 10 out of 10, which indicates strong profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of EPAM Systems is 27%, which ranks better than 82.56% of companies in the Software industry. The 3-year average EBITDA growth is 19.8%, which ranks better than 66.78% of companies in the Software industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, EPAM Systems's ROIC was 22.72, while its WACC came in at 13.82.
Conclusion
In conclusion, the stock of EPAM Systems (NYSE:EPAM) appears to be significantly undervalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 66.78% of 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.
