Looking for a stock that offers the promise of above-average capital gains? One way to screen for such stocks is by checking out the GuruFocus Fast Growers screener. This screener was inspired by Peter Lynch’s 1989 book, “One Up on Wall Street: How to Use What You Already Know to Make Money in the Market." Lynch was looking for “small, aggressive new enterprises that grow at 20 to 25 percent per year.” The GuruFocus screener is more complex (Lynch had limited computing power when he wrote his book in the 1980s), but the spirit is the same.
The screener's criteria include revenue growth of at least 20% per year over the past five years and at least 15% over the past 10 years, a five-year Ebitda growth rate of 20% to 35% per year and a 10-year Ebitda growth rate of at least 20% per year. In other words, stocks that get onto the fast grower list - and stay on it - have to do much more than have one or two good years. They need robust revenue and Ebitda growth for at least 10 years.
EPAM Systems Inc (EPAM, Financial) is one stock that makes the list. This is a company that has an excellent history of growing its top and bottom lines. Moreover, its valuation has taken a hit from discontinued Russia operations, which could provide a value opportunity.
About EPAM
Founded as a software and engineering company, EPAM has expanded over the past 30 years. On its website, the company explains its business as follows:
“Since 1993, we’ve relied on our Engineering DNA to underpin our work with clients, leading to major innovations, digital transformations and business results. In that time, we’ve expanded geographically, as well as extended our core engineering capabilities to include business consulting, design and physical product development. We’ve been at the forefront of some of the most exciting technology-led transformations in the industry, and our story continues into today’s modern age of agile delivery, big data, machine learning and AI.”
Based in Newtown, Pennsylvania, the company has a market cap of $19.17 billion and trailing 12-month revenue of $4.70 billion. EPAM employed roughly 58,000 at the beginning of this year, with over 14,000 of them in Ukraine (according to a company news release in April 2022), 9,416 in Belarus and 8,993 in Russia (according to the 10-K for 2021).
Shortly after Russia announced its invasion of Ukraine on Feb. 24, 2022, EPAM announced it was discontinuing its operations in Russia. It also announced a $100 million humanitarian fund to support its Ukrainian employees (a second fund for charitable organizations followed). As expected, the withdrawal from Russia affected its bottom line, but the effects of this should just be temporary.
Competition
EPAM’s markets are competitive and fast-changing, according to the company's annual report. Competition comes from global technology solutions providers and from regional providers with lower labor costs, including Eastern Europe, India and China. The list of competitors includes Accenture PLC (ACN, Financial), Cognizant Technology Solutions Corp. (CTSH, Financial) and Capgemini SE (CGEMY, Financial).
In addition, the company offered this assessment of its competitive advantages:
“We believe that the principal competitive factors in our business include technical expertise and industry knowledge, end-to-end solution offerings, a reputation for and a track record of high-quality and on-time delivery of work, effective employee recruiting, training and retention, responsiveness to customers’ business needs, ability to scale, financial stability and price.”
GuruFocus compares EPAM with information technology research/analysis firm Gartner Inc (IT, Financial) as well as CDW Corp. (CDW, Financial), a supplier of information technology solutions:
Fundamentals
EPAM has an excellent GF Score of 99 out of 100, indicating it has high scores for all essential business metrics ,measured by the GF Score, which include profitability, GF Value rank, momentum rank, financial strength and growth:
The financial strength rank of 9 out of 10 reflects its low-debt balance sheet. The interest coverage ratio is 125.67 and the Altman Z-Score is 14.81.
The weighted average cost of capital (WACC) is 9.75%, much lower than the return on invested capital (ROIC) of 25.46%, meaning the company is a value creator for shareholders.
Profitability is ranked 10 out of 10. The company's margins are better than average for the software industry. The return on equity is also better than the industry average. It has been profitable for all 10 years of the past decade.
The growth rank is 10 out of 10 thanks to its three and five-year revenue growth rates, the predictability of its five-year revenue growth and its five-year Ebitda growth rate. This is a 10-year chart showing highly consistent revenue growth at a blistering pace of 26.39% annually:
The story is much the same for Ebitda and earnings per share without non-recurring items. Note that both revenue and EPS without NRI have averaged growth of more than 20% per year for the past decade.
Valuation
The GF Value chart estimates EPAM’s intrinsic value at $590.29, which is well above the stock’s market value of $333.30 at the close of trading on Dec. 16, 2022.
The company does not pay a dividend, and it has issued more shares than it has bought back every year for the past 10 years. The only way for shareholders to profit from EPAM is through capital gains.
Looking at the market price chart, the stock topped out at $700.14 on Dec. 8, 2021, and then precipitously plunged to $174.80 on March 7, 2022. That’s a 75% drop in three months, a drop from which it hasn’t yet recovered:
Gurus
Seven gurus had stakes in EPAM at the end of the third quarter. The top three investors were:
- Steve Mandel (Trades, Portfolio) of Lone Pine Capital had the biggest holding by far, with 1,243,044 shares. They represented 2.16% of EPAM’s shares outstanding and 4.24% of the firm's most recent 13F portfolio holdings.
- Ron Baron (Trades, Portfolio) of Baron Funds held 226,990 shares after reducing his holding by 13.45%.
- Steven Cohen (Trades, Portfolio) of Point72 Asset Management cut his position by 74.68% and finished the quarter with 47,418 shares.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
EPAM is very popular with institutional investors, who hold 98.14% of the company, while insiders own another 2.47% (a total of over 100% can mean short selling, a lag in reporting or administrative issues).
Arkadiy Dobkin, the CEO and president as well as one of the founders, held by far the largest stake among insiders with 1,246,461 shares as of Sept. 13.
Conclusion
EPAM Systems’ withdrawal from Russia earlier this year pulled down earnings for two quarters, but since then the business has begun to recover. Yet, its share price has been slow to recover as well, leaving the stock currently undervalued in my view. Combine that with EPAM’s very low debt and this could be a value and growth stock in one.
