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Virtusa Corp. (VRTU): Zacks Rank Buy

Zacks Equity Research

Shares of Virtusa Corp. (VRTU) have soared 30.8% over the past year. The predicted earnings growth rate for this information technology (IT) services company is 23.3% over the next five years, which is higher than the 20.0% expected for the industry. Moreover, management's commentary about an improving demand trend could well be the driving force behind this Zacks #1 Rank's (Strong Buy) aggressive growth.

Client Growth Leads to Q1 Beat

On July 30, 2012, Virtusa reported first quarter earnings per share (EPS) of 24 cents, up 50.0% from the year-ago quarter and ahead of the Zacks Consensus Estimate by 9.1%.

Revenues grew 24.9% year over year to $76.2 million, driven by new client growth and higher contribution from existing clients. Virtusa witnessed increasing demand for its application outsourcing services, partially offset by soft demand for its consulting services. Both the Americas and Europe contributed.

Virtusa provided encouraging second quarter and fiscal 2013 guidance. Revenue for the quarter is expected between $78.5 million and $80.5 million with EPS of 21 cents to 25 cents. For fiscal 2013, revenue is seen between $320.0 million and $330.0 million with EPS of $1.01 to $1.13.

Earnings Estimates Revised Higher

Over the last 60 days, the Zacks Consensus Estimate for 2013 has advanced by 2.9% to $1.06, while the Zacks Consensus Estimate for 2014 is up 3.2% to $1.30. The estimate for fiscal 2013 represents an increase of 33.7% from fiscal 2012, while the estimate for fiscal 2014 represents a year-over-year increase of 23.2%.

Valuation is Attractive

Considering the company's earnings prospects, its valuation looks attractive on a PEG basis. The stock has a PEG ratio of 0.7, compared with the peer group's 2.6, indicating potential upside. The stock's return on equity (:ROE) is 10.5%, which is higher than the peer average of 8.5%. Virtusa is currently trading at a P/E of 17.1X, which is at a premium of 17.1% from the peer group average of 14.6X. The premium looks justified given its growth prospects.

Chart Represents Growth Potential

The 12-month EPS chart clearly shows that both share prices and earnings have trended up over the last few years. The current momentum appears to be driven by the growing client base and price increases supported by estimate growth trends.

Currently, the share price is in the range of $18.00-$19.00. The consensus estimates for 2013 and 2014 are trending upward. The estimate revision graph indicates a steep upward trend through fiscal 2015. As illustrated in the chart below, share prices should increase at a similar or higher rate than the estimate revision trend.

Massachusetts-based Virtusa has roughly 16 years of experience in providing IT services, globally. The company's service offerings include IT consulting, implementation and application outsourcing. Virtusa helps its clients simultaneously reduce their IT operations cost while increasing their ability to meet changing business needs. Currently, the company operates in the United States, the United Kingdom, the Netherlands, Germany and Singapore and has 5,841 employees.

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