Earnings Analysis: Amdocs Ltd.

| About: Amdocs Ltd (DOX)
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Amdocs Ltd. (NYSE:DOX) reports preliminary financial results for the quarter ended 2012-06-30.

Amdocs Ltd. recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. CapitalCube's analysis is based on the company's performance over the last twelve months (unless stated otherwise).

Amdocs Ltd.'s analysis versus peers uses the following peer-set: NTT Data Corp. (9613-JP), Capgemini (CAP), Computer Sciences Corp. (CSC), Groupon Inc. (NASDAQ:GRPN), Jack Henry & Associates Inc. (NASDAQ:JKHY), Otsuka Corp. (4768-JP), 3D Systems Corp. (NYSE:DDD), Comverse Technology Inc. (NASDAQ:CMVT), Synchronoss Technologies Inc. (NASDAQ:SNCR) and AsiaInfo-Linkage Inc. (NASDAQ:ASIA). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-06-30 2012-03-31 2011-12-31 2011-09-30 2011-06-30
Revenues 808.8 808.3 805.9 812.2 803.5
Revenue Growth % 0.1 0.3 (0.8) 1.1 1.8
Net Income 98.7 101.9 92.7 87.4 91.8
Net Income Growth % (3.1) 9.9 6.1 (4.8) (2.5)
Net Margin % 12.2 12.6 11.5 10.8 11.4
ROE % (Annualized) 13.1 13.5 12.3 11.3 11.6
ROA % (Annualized) 8.9 9.3 8.2 7.6 8.1

Valuation Drivers

Amdocs Ltd.'s current Price/Book of 1.8 is about median in its peer group. We classify DOX-US as Harvesting because of the market's low expectations of growth (PE of 14.7 compared to peer median of 20.6) despite its relatively high returns (ROE of 12.4% compared to the peer median ROE of 8.5%).

The company attempts to achieve high profit margins (currently 11.8% vs. peer median of 4.2%) through differentiated products. It currently operates with peer median asset turns of 0.7x. DOX-US's net margin has increased 0.9 percentage points from last year's low and is now close to its five-year average net margin.

Economic Moat

DOX-US's revenues have changed in-line with its peers (year-on-year change in revenues is 6.6%) but its earnings have lagged (annual reported earnings have changed by 0.8% compared to the peer median of 19.9%), implying that the company has less control over its costs relative to its peers. DOX-US is currently converting every 1% of change in revenue into 0.1% change in annual reported earnings.

DOX-US's return on assets is above its peer median both in the current period (8.5% vs. peer median 4.2%) and also over the past five years (7.9% vs. peer median 5.1%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's comparatively low gross margin of 39.7% versus peer median of 49.7% suggests that it follows a non-differentiated strategy or is in a pricing constrained position. However, DOX-US's bottom-line operating performance is better than peer median (pre-tax margins of 13.2% compared to peer median 5.9%) suggesting relatively tight control on operating costs.

Growth & Investment Strategy

DOX-US's revenues have grown more slowly than the peer median over the last few years (0.2% vs. 3.6% respectively for the past three years) and the stock price's relatively low PE ratio of 14.7 implies relatively low future growth as well. Overall, we view the company's growth expectations as substandard relative to its peers.

DOX-US's annualized rate of change in capital of 0.2% over the past three years is less than its peer median of 6.3%. This investment has generated a better than peer median return on capital of 10.3% averaged over the same three years. This combination of a relatively low investment with good returns suggests that the company is likely milking its business.

Earnings Quality

DOX-US has reported relatively strong net income margin for the last twelve months (11.8% vs. peer median of 4.2%). This strong margin performance was accompanied by a level of accruals that was around peer median (4.0% vs. peer median of 4.5%) suggesting that the reported net income is supported by a reasonable level of accruals.

DOX-US's accruals over the last twelve months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.

Trend Charts

Company Profile

Amdocs Ltd. provides computer systems integration for communications, media and entertainment. The company's principal activities are to develop, implement and manage software and services associated with business support systems (BSS) and operational support systems (NASDAQ:OSS) to enable service providers to introduce new products. The company was founded in 1982 and is headquartered in Chesterfield, MO.

Disclosure: I 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. I have no business relationship with any company whose stock is mentioned in this article.

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