On Monday, TD Cowen sustained its Hold rating on EPAM Systems (NYSE:EPAM) with a consistent price target of $200.00. The firm addressed EPAM's recent move to acquire First Derivative (FD), a firm that offers IT and knowledge process outsourcing services, focusing on capital markets and boasting a workforce of over 1,800 employees.
First Derivative reported revenues of £170 million for the fiscal year ending in February 2024, marking an 8% decrease year-over-year, with an adjusted EBITDA margin of 11%.
The acquisition is expected to contribute approximately five percentage points to EPAM's annualized revenue growth. However, the addition of FD's diversified services, which come with a lower margin profile, raises some concerns. TD Cowen estimates the enterprise value to sales (EV/Sales) ratio at around 1.4 times and the enterprise value to EBITDA (EV/EBITDA) ratio at roughly 13 times. The firm anticipates the acquisition to have a roughly neutral impact on EPAM's earnings per share (EPS) for the fiscal year 2025.
The analyst's commentary highlighted the financial aspects of the deal, noting that while it could enhance EPAM's revenue, the implications for profitability due to the service diversification and margin differences remain unclear. The financial metrics provided by TD Cowen suggest a valuation that takes into account the current financial state of First Derivative and its potential integration with EPAM.
EPAM's strategic decision to acquire First Derivative is aimed at expanding its service offerings in the capital markets sector. The analysis by TD Cowen indicates a cautious outlook on the acquisition's immediate financial effects, with a focus on the longer-term EPS outcome. The Hold rating and $200.00 price target reflect the firm's current assessment of EPAM's stock value in light of the planned acquisition and its expected financial impact.
In other recent news, EPAM Systems has made significant headlines with its strategic acquisition of NEORIS, a global technology consultancy firm. Despite concerns about the scale of the acquisition and potential integration challenges, Piper Sandler maintained its Overweight rating on EPAM Systems, while Mizuho retained its Outperform rating, highlighting the potential growth and expansion facilitated by the acquisition.
On the other hand, Deutsche Bank initiated coverage on EPAM Systems with a Hold rating due to operational challenges the company faced in recent years due to geopolitical unrest.
In terms of financial performance, EPAM Systems reported a decrease in its 2024 organic CC revenue forecast, leading to Mizuho Securities lowering its stock price target to $245 from $258. Despite the downward revision in revenue guidance, Mizuho continues to see a positive future for EPAM Systems. These are some of the recent developments for investors to consider.
Jefferies upgraded its stock rating from Hold to Buy, raising its price target to $237 based on the potential of artificial intelligence as a growth catalyst. Conversely, Goldman Sachs initiated coverage on EPAM Systems with a Neutral rating and a price target of $200.
InvestingPro Insights
To complement TD Cowen's analysis of EPAM Systems' acquisition of First Derivative, recent data from InvestingPro provides additional context for investors. EPAM's market capitalization stands at $11.01 billion, with a P/E ratio of 27.29, reflecting the market's current valuation of the company. Despite the recent acquisition and the challenges in the IT services sector, EPAM maintains a strong financial position. An InvestingPro Tip highlights that EPAM holds more cash than debt on its balance sheet, which could be advantageous as it integrates First Derivative and navigates potential market uncertainties.
The company's revenue for the last twelve months as of Q2 2024 was $4.62 billion, with a slight decline of 4.5% in revenue growth. This aligns with TD Cowen's observation about the potential revenue boost from the First Derivative acquisition. Another relevant InvestingPro Tip notes that EPAM has been profitable over the last twelve months, with a gross profit margin of 30.11% and an operating income margin of 11.63%. These figures will be important to monitor as EPAM incorporates First Derivative's lower-margin services into its portfolio.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for EPAM Systems, providing deeper insights into the company's financial health and market position.
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