Bear Of The Day: EPAM
Earnings estimates have been dropping for EPAM Systems (EPAM - Snapshot Report) after the company delivered an earnings miss for the first quarter. The decline in estimates has been significant enough to send shares of EPAM to a Zacks Rank of 5 (Strong Sell), placing it in the bottom 5% of all stocks that Zacks ranks based on earnings momentum.
Meanwhile, shares do not look cheap with a Zacks Value Style Score of 'F'.
EPAM provides complex software engineering solutions and information technology services to clients around the globe. Its customers are primarily Fortune Global 2000 companies in a variety of industries, but its main focus is Independent Software Vendors and technology (22% of total revenue), financial services (28%), business information and media (13%), and travel and hospitality (22%) firms.
Approximately 50% of total revenue comes from North America.
Its five largest customers accounted for 36% of total revenue in the first quarter of 2015. Just one customer - UBS (UBS) - accounted for more than 15% of total revenue.
First Quarter Results
EPAM reported its first quarter results on May 6. Adjusted earnings per share (but including stock-based compensation expense) came in at $0.32, missing the Zacks Consensus Estimate by 11 cents. It was a 16% decrease from adjusted EPS of $0.38 in the same quarter last year.
Revenue rose 25% year-over-year to $200.0 million. Revenue was up 25% in North America and 35% in Europe but fell 30% in Russia.
However, the GAAP operating margin declined from 13.6% to 11.4% of revenues, due in part to a 45% increase in selling, general and administrative expenses. The number of IT professionals surged 30% year-year-year to 12,665. Meanwhile, stock-based compensation expense shot up 185% to $9.134 million. Approximately $4.0 million of the increase was due 2014 acquisitions.
Additionally, operating cash flow plunged 58% year-over-year to $6.9 million due in part to higher working capital requirements, including growth in total compensation, and higher tax payments. The weighted average diluted share count increased 3.6% year-over-year.
Estimates Falling
Following Q1 results, analysts lowered their earnings estimates for EPAM for both 2015 and 2016. The 2015 Zacks Consensus Estimate is now $1.79, down from $2.06 before the report. The 2016 consensus is currently $2.26, down from $2.47 over the same report.
Once again, these estimates include stock-based compensation expense.
Lofty Valuation
Shares of EPAM are not cheap. The stock trades at a lofty 34x 12-month forward earnings. And its enterprise value to cash flow ratio is a whopping 37x.
It's easy to see why the Zacks Value Style Score for EPAM is an 'F'.
The Bottom Line
With declining earnings estimates and lofty valuation, investors should consider avoiding EPAM for now.
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