ePlus Is Undervalued, But Price Resistance And Cash Levels Are Concerns

| About: ePlus Inc. (PLUS)


ePlus is attractively priced, trading on FY16 P/E of 10.6x and P/S of 0.37x.

Ranks among the cheapest 10% across the Russell 3,000 in terms of current EV/Ebitda and P/S levels. Companies in these deciles have produced annual returns of 15.1% and 19.3% respectively.

Ranks among the most efficient 10% as measured by Asset Turnover. Companies in this band have delivered annualised returns of 11.2% over the past 14 years.

Share price is in an uptrend and momentum looks to be recovering. However, there is resistance at $60 that has proved to be stubborn.

Divergence between positive earnings and negative cash a red flag that investors need to be comfortable with before investing.

The Value in Trends® (VIT) system uses a quantitative approach to screen for value. Then, the trend direction, momentum and condition is analyzed to determine investment entry/exit points. The ViT system produces an efficient overview of the fundamentals and technicals of a company, paving the way for further extensive research into economic conditions, industry dynamics and company specifics.


In their FY14 financial results, ePlus (NASDAQ:PLUS) revenue rose 7.6% to $1.1 billion, more than consensus estimates of $1.06 billion and higher than the $983.1 million of a year earlier. Net earnings increased 1.3% to $35.3 million from $34.8 million. That's an increase in EPS from $4.32 to $4.37, which was marginally below analyst estimates of $4.40.

In response to the earnings release on June 3, analysts have downgraded their forecasts. Earnings of $37.7 billion are now expected off sales of $1.13 billion, giving an EPS of $4.99. In 2016, sales will increase to $1.19 billion, with earnings of $42.2 billion and a resulting EPS of $5.57.

Source: Bloomberg

With the share price trading at $59.04 as at the end of June, the FY15 EPS estimate has the company trading on a forward P/E of 11.8x but then reducing to 10.6x in 2016. Elsewhere, other forward valuation multiples also look attractive. FY15 and FY16 Price/Sales are only 0.39x and 0.37x respectively, highlighting the seeming opportunity in ePlus.


I define value as the combination of an attractive price and quality factors. Quality can be further broken down into profitability, health and efficiency.

(I) Relative Price

To examine price, I use the conventional approach of analyzing price multiples. I rank these into deciles with 1 being the cheapest 10% and 10 indicating the most expensive 10% of companies based on that specific multiple. Then, I backtest the performance of each of these deciles going back over the past 14 years (end December 1999 to end December 2013) to determine whether the company is attractively positioned based on the historical returns. I conducted my tests across the Russell 3,000 index.

Source: Bloomberg

  • ePlus's Ev/Ebitda of 5.5 ranks them in the 1st decile and amongst the cheapest 10% of companies across the Russell 3,000. Based on the backtested returns, companies in this decile have produced the highest returns, 15.1% p/a.
  • The company has a P/E of 13x, which ranks them in the 2nd decile. This has also been the 2nd best performing decline over the period tested, producing an annualised return of 10.3% p/a.
  • Trading on a P/S of only 0.4x, ePlus is ranked in the 1st decile. Companies in this band have delivered annual returns of 19.3% p/a, which is the best performing.
  • ePlus trade on a P/B of 1.8, which is in the 4th decile and delivered annualised returns of 8.7%. That has been the 4th best performing decile over the past 14 years.

(ii) Quality

For quality purposes, I first analyze profitability and break down the calculation of Return on Equity through DuPont analysis. The resulting figure for Asset Turnover then measures efficiency while the reading for Leverage is an indication of health. Combined with profit margins, this gives a good overview of company quality.

Once again, I rank the components into deciles from 1-10. Then, I backtest the performance of each of these deciles on the Russell 3,000 going back over the past 14 years to determine whether the company is attractively positioned based on the historical returns.

Source: Bloomberg

  • ePlus has an ROE of 14%, which ranks it in the 3rd decile across the Russell 3,000. Companies in this decile have produced annualised returns of 6.9% over the past 14 years, only the 6th best performing.
  • Asset Turnover is strong at 2.1x, which puts ePlus among the top 10%. This has been the best performing decile over the period tested and rewarded investors with annualised returns of 11.2%.
  • Profit Margins are low at only 3.2%, which ranks the company in the 7th decile. Despite what most investors might think, this has actually been the 2nd best performing decile. producing annualised returns of 9.6%.
  • ePlus ranks in the 5th decile of leverage, with a reading of 2.0x. This has been the 4th best performing decile in the Russell 3,000 with annualised returns of 7.7%.


I break down the examination of a company's trend into three components:

  1. Direction of the trend
  2. Momentum of the trend and;
  3. Condition of the trend

Trend Direction

  • MYYR's share price has enjoyed a meteoric rise over the lows of $5.50 during the week ended 17 August, 2007. Since then, the share price has risen 965%. Support comes in the form of the 50, 100 and 200-week MAs at $55.61, $50.05 and $38.59 respectively. Not since early 2009 has the price traded below the 100-week MA. It did threaten to do so in May of this year but the level held and set up the next leg higher.

Source: Bloomberg

Trend Momentum

  • Momentum, as measured by the moving average convergence divergence (MACD) indicator, peaked at the beginning of August 2013. Along with the share price, it then suffered a sharp correction and since the beginning of 2014, it has remained subdued. In May, momentum actually dipped in negative territory before recovering. As at the end of June, the momentum reading is 0.65.

Source: Bloomberg

Trend Condition

  • The key levels to look out for on the RSI chart are 70 and above, which equates to an overbought condition. Meanwhile, a reading of 30 or below reflects an oversold condition. The weekly RSI for the MYRG is almost 58. Therefore, it is still in a neutral condition with room to rise further.

Source: Bloomberg


From a quantitative value perspective, ePlus appeals, ranking amongst the cheapest 10% of companies in the Russell 3,000 across Ev/Ebitda and P/S. Meanwhile , the company is also amongst the 20% cheapest in term of P/E. Historically, companies in this valuation brackets have produced annualised returns of 10-19%.

While the quality fundamentals are not as attractive as that of the relative price fundamentals, they are nevertheless solid. Asset Turnover of 2.1 impresses and ranks in the top 10%. Although profit margins are low, companies in the same decile as ePlus have actually produced impressive gains, since 2001.

The technical analysis reveals a share price in a strong uptrend. Momentum is beginning to recover but it has threatened to do so before only to disappoint. Therefore, it needs to be monitored. Despite the strong rise in price over the years, the condition is still not overbought, suggesting ePlus might have further still to run.

To sum up, from a long-term investment perspective, the initial evaluation on ePlus is quite positive. However, there is one red flag that needs to be investigated that our screen has thrown up. P/E is positive but P/CF is negative. When you look at the financial statements, you will notice the trend in positive earnings compared with the volatile nature of cash flows form operations. FY10, FY11, FY12 and FY14 all show negative cash from operations during these years. For more on the company, you can check out their June presentation here and their website here.

The company is also due to release earnings on August 6th, which will give investors a greater insight the industry and company specific dynamics. Consensus estimates are for sales of $271.3 million and net income of $8.43 million in the upcoming quarter. That equates to an EPS figure of $1.13, which also represents a y-y growth of 16.2%. However, brokers have been downgrading considerably these estimates since May, where the projection was for EPS of $1.23. Of the 5 brokers covering the stock, all 5 have a buy rating. The consensus target price is $69.

From a shorter-term trade perspective, the price action over the past number of years is impressive. However, it has also struggled to break through the $60 barrier over the past few months, suggesting a lack of momentum or conviction behind the rise. My preference would be to enter a position closer to the 100-week MA at $50 with rising momentum, rather than the present set up.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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