Intrinsic value of EPAM Systems, Inc. - EPAM

Previous Close

$174.50

  Intrinsic Value

$175.00

stock screener

  Rating & Target

hold

0%

Previous close

$174.50

 
Intrinsic value

$175.00

 
Up/down potential

0%

 
Rating

hold

We calculate the intrinsic value of EPAM stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 9.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  26.50
  24.35
  22.42
  20.67
  19.11
  17.70
  16.43
  15.28
  14.26
  13.33
  12.50
  11.75
  11.07
  10.47
  9.92
  9.43
  8.98
  8.59
  8.23
  7.90
  7.61
  7.35
  7.12
  6.91
  6.71
  6.54
  6.39
  6.25
  6.13
  6.01
Revenue, $m
  2,331
  2,899
  3,549
  4,283
  5,101
  6,003
  6,990
  8,058
  9,206
  10,434
  11,738
  13,116
  14,569
  16,093
  17,689
  19,357
  21,096
  22,907
  24,792
  26,751
  28,788
  30,905
  33,104
  35,390
  37,767
  40,238
  42,809
  45,485
  48,271
  51,173
Variable operating expenses, $m
  1,892
  2,347
  2,868
  3,456
  4,112
  4,836
  5,627
  6,484
  7,405
  8,389
  9,412
  10,517
  11,682
  12,904
  14,184
  15,521
  16,916
  18,368
  19,879
  21,450
  23,084
  24,781
  26,545
  28,378
  30,283
  32,265
  34,326
  36,472
  38,706
  41,033
Fixed operating expenses, $m
  101
  103
  106
  108
  110
  113
  115
  118
  120
  123
  126
  129
  131
  134
  137
  140
  143
  146
  150
  153
  156
  160
  163
  167
  171
  174
  178
  182
  186
  190
Total operating expenses, $m
  1,993
  2,450
  2,974
  3,564
  4,222
  4,949
  5,742
  6,602
  7,525
  8,512
  9,538
  10,646
  11,813
  13,038
  14,321
  15,661
  17,059
  18,514
  20,029
  21,603
  23,240
  24,941
  26,708
  28,545
  30,454
  32,439
  34,504
  36,654
  38,892
  41,223
Operating income, $m
  338
  449
  575
  718
  878
  1,054
  1,247
  1,456
  1,681
  1,922
  2,200
  2,471
  2,755
  3,055
  3,368
  3,695
  4,037
  4,393
  4,763
  5,148
  5,548
  5,964
  6,396
  6,846
  7,313
  7,799
  8,305
  8,831
  9,379
  9,950
EBITDA, $m
  391
  509
  644
  797
  968
  1,156
  1,362
  1,585
  1,825
  2,082
  2,355
  2,643
  2,947
  3,267
  3,601
  3,950
  4,315
  4,694
  5,089
  5,500
  5,927
  6,371
  6,832
  7,312
  7,810
  8,329
  8,868
  9,430
  10,014
  10,624
Interest expense (income), $m
  1
  1
  6
  12
  19
  26
  35
  44
  54
  65
  77
  89
  103
  117
  131
  147
  163
  180
  198
  217
  236
  256
  277
  298
  321
  344
  369
  394
  420
  448
  476
Earnings before tax, $m
  337
  442
  563
  699
  852
  1,020
  1,203
  1,403
  1,617
  1,845
  2,111
  2,368
  2,639
  2,923
  3,221
  3,532
  3,857
  4,194
  4,546
  4,912
  5,292
  5,687
  6,098
  6,525
  6,969
  7,430
  7,911
  8,411
  8,931
  9,474
Tax expense, $m
  91
  119
  152
  189
  230
  275
  325
  379
  436
  498
  570
  639
  712
  789
  870
  954
  1,041
  1,133
  1,227
  1,326
  1,429
  1,536
  1,646
  1,762
  1,882
  2,006
  2,136
  2,271
  2,411
  2,558
Net income, $m
  246
  323
  411
  511
  622
  744
  879
  1,024
  1,180
  1,347
  1,541
  1,729
  1,926
  2,134
  2,351
  2,578
  2,815
  3,062
  3,319
  3,586
  3,863
  4,152
  4,452
  4,763
  5,087
  5,424
  5,775
  6,140
  6,520
  6,916

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,397
  1,737
  2,126
  2,566
  3,056
  3,597
  4,188
  4,828
  5,516
  6,251
  7,033
  7,859
  8,729
  9,642
  10,599
  11,598
  12,640
  13,725
  14,854
  16,028
  17,249
  18,517
  19,835
  21,205
  22,628
  24,109
  25,650
  27,253
  28,922
  30,661
Adjusted assets (=assets-cash), $m
  1,397
  1,737
  2,126
  2,566
  3,056
  3,597
  4,188
  4,828
  5,516
  6,251
  7,033
  7,859
  8,729
  9,642
  10,599
  11,598
  12,640
  13,725
  14,854
  16,028
  17,249
  18,517
  19,835
  21,205
  22,628
  24,109
  25,650
  27,253
  28,922
  30,661
Revenue / Adjusted assets
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
  1.669
Average production assets, $m
  242
  302
  369
  445
  530
  624
  727
  838
  957
  1,085
  1,221
  1,364
  1,515
  1,674
  1,840
  2,013
  2,194
  2,382
  2,578
  2,782
  2,994
  3,214
  3,443
  3,681
  3,928
  4,185
  4,452
  4,730
  5,020
  5,322
Working capital, $m
  210
  261
  319
  385
  459
  540
  629
  725
  829
  939
  1,056
  1,180
  1,311
  1,448
  1,592
  1,742
  1,899
  2,062
  2,231
  2,408
  2,591
  2,781
  2,979
  3,185
  3,399
  3,621
  3,853
  4,094
  4,344
  4,606
Total debt, $m
  117
  225
  348
  487
  642
  812
  999
  1,201
  1,419
  1,651
  1,898
  2,159
  2,434
  2,723
  3,025
  3,341
  3,670
  4,013
  4,370
  4,741
  5,126
  5,527
  5,944
  6,376
  6,826
  7,294
  7,781
  8,288
  8,815
  9,365
Total liabilities, $m
  441
  549
  672
  811
  966
  1,137
  1,323
  1,526
  1,743
  1,975
  2,222
  2,483
  2,758
  3,047
  3,349
  3,665
  3,994
  4,337
  4,694
  5,065
  5,451
  5,851
  6,268
  6,701
  7,151
  7,618
  8,105
  8,612
  9,139
  9,689
Total equity, $m
  955
  1,188
  1,454
  1,755
  2,090
  2,460
  2,865
  3,302
  3,773
  4,276
  4,810
  5,375
  5,971
  6,595
  7,250
  7,933
  8,646
  9,388
  10,160
  10,963
  11,798
  12,666
  13,567
  14,504
  15,478
  16,491
  17,544
  18,641
  19,783
  20,972
Total liabilities and equity, $m
  1,396
  1,737
  2,126
  2,566
  3,056
  3,597
  4,188
  4,828
  5,516
  6,251
  7,032
  7,858
  8,729
  9,642
  10,599
  11,598
  12,640
  13,725
  14,854
  16,028
  17,249
  18,517
  19,835
  21,205
  22,629
  24,109
  25,649
  27,253
  28,922
  30,661
Debt-to-equity ratio
  0.120
  0.190
  0.240
  0.280
  0.310
  0.330
  0.350
  0.360
  0.380
  0.390
  0.390
  0.400
  0.410
  0.410
  0.420
  0.420
  0.420
  0.430
  0.430
  0.430
  0.430
  0.440
  0.440
  0.440
  0.440
  0.440
  0.440
  0.440
  0.450
  0.450
Adjusted equity ratio
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684
  0.684

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  246
  323
  411
  511
  622
  744
  879
  1,024
  1,180
  1,347
  1,541
  1,729
  1,926
  2,134
  2,351
  2,578
  2,815
  3,062
  3,319
  3,586
  3,863
  4,152
  4,452
  4,763
  5,087
  5,424
  5,775
  6,140
  6,520
  6,916
Depreciation, amort., depletion, $m
  53
  61
  69
  79
  90
  101
  114
  128
  144
  160
  155
  173
  192
  212
  233
  255
  278
  302
  326
  352
  379
  407
  436
  466
  497
  530
  564
  599
  635
  674
Funds from operations, $m
  299
  383
  480
  589
  711
  846
  993
  1,152
  1,324
  1,507
  1,695
  1,901
  2,118
  2,346
  2,584
  2,833
  3,093
  3,364
  3,645
  3,938
  4,242
  4,559
  4,887
  5,229
  5,584
  5,954
  6,338
  6,739
  7,155
  7,590
Change in working capital, $m
  44
  51
  58
  66
  74
  81
  89
  96
  103
  110
  117
  124
  131
  137
  144
  150
  157
  163
  170
  176
  183
  190
  198
  206
  214
  222
  231
  241
  251
  261
Cash from operations, $m
  255
  332
  422
  523
  638
  765
  904
  1,056
  1,220
  1,396
  1,578
  1,777
  1,987
  2,209
  2,441
  2,683
  2,936
  3,201
  3,475
  3,762
  4,059
  4,368
  4,689
  5,023
  5,371
  5,732
  6,107
  6,498
  6,905
  7,328
Maintenance CAPEX, $m
  -24
  -31
  -38
  -47
  -56
  -67
  -79
  -92
  -106
  -121
  -137
  -155
  -173
  -192
  -212
  -233
  -255
  -278
  -302
  -326
  -352
  -379
  -407
  -436
  -466
  -497
  -530
  -564
  -599
  -635
New CAPEX, $m
  -51
  -59
  -68
  -76
  -85
  -94
  -103
  -111
  -119
  -128
  -136
  -143
  -151
  -159
  -166
  -173
  -181
  -188
  -196
  -204
  -212
  -220
  -229
  -238
  -247
  -257
  -267
  -278
  -290
  -302
Cash from investing activities, $m
  -75
  -90
  -106
  -123
  -141
  -161
  -182
  -203
  -225
  -249
  -273
  -298
  -324
  -351
  -378
  -406
  -436
  -466
  -498
  -530
  -564
  -599
  -636
  -674
  -713
  -754
  -797
  -842
  -889
  -937
Free cash flow, $m
  180
  243
  316
  400
  496
  604
  723
  853
  995
  1,148
  1,305
  1,479
  1,664
  1,858
  2,063
  2,277
  2,501
  2,734
  2,978
  3,231
  3,495
  3,769
  4,054
  4,350
  4,657
  4,977
  5,310
  5,656
  6,016
  6,391
Issuance/(repayment) of debt, $m
  92
  107
  123
  139
  155
  171
  187
  202
  217
  232
  247
  261
  275
  289
  302
  316
  329
  343
  357
  371
  386
  401
  416
  433
  450
  468
  487
  507
  527
  550
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  92
  107
  123
  139
  155
  171
  187
  202
  217
  232
  247
  261
  275
  289
  302
  316
  329
  343
  357
  371
  386
  401
  416
  433
  450
  468
  487
  507
  527
  550
Total cash flow (excl. dividends), $m
  272
  350
  439
  539
  651
  774
  909
  1,055
  1,212
  1,380
  1,552
  1,740
  1,939
  2,147
  2,365
  2,593
  2,830
  3,077
  3,335
  3,602
  3,881
  4,170
  4,470
  4,783
  5,107
  5,445
  5,797
  6,163
  6,544
  6,941
Retained Cash Flow (-), $m
  -201
  -233
  -266
  -301
  -335
  -370
  -404
  -438
  -471
  -503
  -534
  -565
  -595
  -625
  -654
  -683
  -713
  -742
  -772
  -803
  -835
  -867
  -901
  -937
  -974
  -1,013
  -1,054
  -1,097
  -1,142
  -1,189
Prev. year cash balance distribution, $m
  508
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  579
  117
  173
  239
  316
  405
  505
  618
  742
  877
  1,018
  1,175
  1,344
  1,522
  1,711
  1,909
  2,117
  2,335
  2,562
  2,799
  3,046
  3,302
  3,569
  3,846
  4,133
  4,432
  4,743
  5,066
  5,402
  5,751
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  555
  108
  150
  196
  245
  294
  341
  386
  426
  460
  483
  502
  511
  511
  502
  485
  461
  430
  395
  356
  315
  274
  234
  196
  161
  129
  102
  78
  59
  43
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

EPAM Systems, Inc. is a g provider of software product development and digital platform engineering services to clients located primarily in North America, Europe, Asia and Australia. The Company's service offerings cover the full software product development lifecycle from digital strategy and customer experience design to enterprise application platforms implementation and program management services and from complex software development services to maintenance, support, custom application development, application testing, and infrastructure management. Its service offerings include Software Product Development Services, Custom Application Development Services, Application Testing Services, Enterprise Application Platforms, Application Maintenance and Support, and Infrastructure Management Services. It offers its solutions and services to industries, such as financial services, media and entertainment, travel and consumer, software and hi-tech, and life sciences and healthcare.

FINANCIAL RATIOS  of  EPAM Systems, Inc. (EPAM)

Valuation Ratios
P/E Ratio 90.1
Price to Sales 7.7
Price to Book 11.4
Price to Tangible Book
Price to Cash Flow 54
Price to Free Cash Flow 65.6
Growth Rates
Sales Growth Rate 26.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 61.1%
Cap. Spend. - 3 Yr. Gr. Rate 12.6%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 3.2%
Total Debt to Equity 3.2%
Interest Coverage 127
Management Effectiveness
Return On Assets 11.7%
Ret/ On Assets - 3 Yr. Avg. 12.5%
Return On Total Capital 13.6%
Ret/ On T. Cap. - 3 Yr. Avg. 15.1%
Return On Equity 14.2%
Return On Equity - 3 Yr. Avg. 15.5%
Asset Turnover 1.4
Profitability Ratios
Gross Margin 36.5%
Gross Margin - 3 Yr. Avg. 37.3%
EBITDA Margin 12.9%
EBITDA Margin - 3 Yr. Avg. 13.5%
Operating Margin 11.6%
Oper. Margin - 3 Yr. Avg. 11.6%
Pre-Tax Margin 10.9%
Pre-Tax Margin - 3 Yr. Avg. 11.5%
Net Profit Margin 8.5%
Net Profit Margin - 3 Yr. Avg. 9.1%
Effective Tax Rate 21.4%
Eff/ Tax Rate - 3 Yr. Avg. 20.6%
Payout Ratio 0%

EPAM stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the EPAM stock intrinsic value calculation we used $1843 million for the last fiscal year's total revenue generated by EPAM Systems, Inc.. The default revenue input number comes from 0001 income statement of EPAM Systems, Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our EPAM stock valuation model: a) initial revenue growth rate of 26.5% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for EPAM is calculated based on our internal credit rating of EPAM Systems, Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of EPAM Systems, Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of EPAM stock the variable cost ratio is equal to 81.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $99 million in the base year in the intrinsic value calculation for EPAM stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for EPAM Systems, Inc..

Corporate tax rate of 27% is the nominal tax rate for EPAM Systems, Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the EPAM stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for EPAM are equal to 10.4%.

Life of production assets of 7.9 years is the average useful life of capital assets used in EPAM Systems, Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for EPAM is equal to 9%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1262.596 million for EPAM Systems, Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 54.169 million for EPAM Systems, Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of EPAM Systems, Inc. at the current share price and the inputted number of shares is $9.5 billion.

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