Investment Alert: Buy EPAM Under $210/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
Lone Pine Capital may not be an investment management firm that you know of but it’s got $10.8 billion under management and is run by billionaire Stephen Mandel, who bet almost 3% of the fund’s capital on a single, under-the-radar stock: EPAM.
EPAM Systems is a global leader in digital transformation services, with a focus on software engineering and consulting. It has a strong track record of growth, with revenue and earnings per share increasing at a compound annual growth rate (CAGR) of 17% and 20%, respectively, over the past five years.
Best of all, we think it has significant upside and is technically lying at a very important and attractive level.
- EPAM has consistently reported year-over-year top line growth and operating income in the black for the past 5 years, even during the COVID-19 pandemic and the 2022 market crash.
- The company has a strong balance sheet, with $1.749 billion in cash and just $28 million in long-term debt.
- The price is very close to a very long-term support line, which could be a sign that the stock has a good reward to risk ratio.
Let’s Peer Behind The Curtain
When a company can post revenue and earnings growth through boom and bust cycles, it warrants a closer look. And that’s precisely what EPAM has done. We examined its financials all the way back to 2019 and the results are stunning.
Every single quarter, EPAM reported year-over-year top line growth. That’s quite a feat when you consider the market fell by about 20% in 2022, and COVID ravaged the world in 2020-21.
Perhaps more impressively, management reported operating income in the black every single quarter too, suggesting that costs were very much under control.
It’s no wonder why Stephen Mandel allocated 2.8% of Lone Pine Capital’s AUM to the stock on these facts alone. But it gets better because EPAM has a good-looking balance sheet too that is full to the brim with cash of $1.749 billion and long-term debt of just $28 million.
Indeed, when examining EPAM a lot of the numbers are just stellar. For example, the return on invested capital sits at north of 18%. So why has the share price been slashed from above $700 in 2021 to close to $200 now?
The short answer is a slowdown in forecast by the company which lowered its guidance citing a “deterioration in the near-term demand.”
Buy, Sell, or Hold?
While analysts have become more pessimistic on EPAM, the stock has not continued its downdraft on recent negative news. That’s a positive divergence, and a look at the long-term stock chart might reveal something bulls can be optimistic about. The price is very close to a very long-term support line.
Beyond the technicals, the company is trading at a very attractive valuation. EPAM has 48.7% upside to $312 based on a discounted cash flow forecast analysis, though it must be noted that analysts have a more pessimistic consensus price target of $265 per share.
On the whole, the reward to risk opportunity for a long-term play appears compelling at these prices. And that’s probably why billionaire Stephen Mandel increased his holdings last quarter.