3Q Preview For EPAM Systems: Expect Continued Double-Digit Revenue Growth And Annual Guidance Raise

Oct. 11, 2019 10:41 AM ETEPAM Systems, Inc. (EPAM)1 Comment
Alexander Veytsman profile picture
Alexander Veytsman
1.6K Followers

Summary

  • Financial Services, Health, and Consumer are core verticals behind double-digit revenue growth.
  • Competitive pricing remains key to Eastern European accounts.
  • Third quarter earnings is usually the time to raise annual guidance at EPAM.

Company Description

EPAM is a company that offers software engineering and product development solutions in the IT services space, being one of the leaders in the industry. The company occupies a niche space in consulting and outsourcing fields, focusing on lifecycle software testing, product deployment and end-user customization, performance tuning, managed services, and cross-platform migration, among other tasks. EPAM’s main competitors are Accenture, IBM, Cognizant, and Infosys, though its core differentiating factor is the labor sourcing platform, since the vast majority of the company’s employees come from Eastern Europe, largely Belarus, Ukraine, and Russia. EPAM serves technology companies in financial service, travel and consumer, software and hi-tech, media and entertainment, as well as healthcare. It derives about 50% of revenue from the United States, 40% from Western Europe, and approximately 10% from CIS and the emerging markets.

Valuation

Per our industry-wide analysis and EPAM’s strong fundamentals, as well as in light of the recent favorable guidance, we believe that EPAM shares merit ~22x PE multiple on 2020 earnings. We note that this multiple comes at a ~1.5-2x discount relative to other players in the IT Services space. When we apply it to our 2020 non-GAAP EPS estimate of $9.75 (down from our previous estimate of $9.77), we get the target price of $215.

Five Core Expectations for 3Q Earnings:

  1. Our channel checks indicate that Financial Services vertical has outperformed in 3Q, growing as much as 25% Y/Y, with an upside coming from the bulge-bracket accounts, such as Barclays and possibly UBS, where cloud-related and back-end services have been more aggressive than usual. While EPAM has been fairly competitive with pricing, we do not anticipate major pricing cuts in the financial services space, particularly with established accounts.
  2. Aggressive new account growth in Eastern Europe. Given the pricing concessions that we just referenced, it

This article was written by

Alexander Veytsman profile picture
1.6K Followers
Alexander Veytsman's areas of expertise are long/short equities, as well as the macroeconomic trends of the US economy. Opinions expressed in the published articles are exclusively his own, and not affiliated with any company.

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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