It's true that shares have stumbled lately as this consulting and outsourcing company has been lowering its expectations for the current quarter, but Infosys has zero debt and bright prospects in the long run that investors can't afford to ignore.
India-based Infosys has been trading in a range between $15.20 to $19.46 over the past year. Based on earnings estimates for the company's fiscal year ending in March 2017, the stock has a price-to-earnings ratio of 16.6, according to Yahoo Finance. That is basically in line with the 16.5 forward P/E for the S&P 500. Infosys' P/E based on trailing 12-month earnings is 18.5. The stock was trading early Monday at $16.29, up 0.5% from Friday's close. That puts it 7.2% above its 52-week low and 16% below its 52-week high.
Following last week's selloff, however, the stock should start consolidating around current levels.
Like other large information technology companies, Infosys is strengthening its business segments with acquisitions and investments. Earlier this year, it acquired Panaya, which provides automation technology for large-scale enterprise software management. Other acquisitions include the purchase in June of Kallidus. And the latest acquisition is Noah Consulting, a provider of advanced information management consulting services for the oil and gas industry. The acquisition positioned Infosys to offer end-to-end data management services to oil and gas companies globally.
Last week, the information technology company warned investors of weaker margins in the company's fiscal third quarter, which concludes at the end of December. (Its 2016 fiscal year ends in March.) It's worth noting that in late October, when the company lowered its revenue outlook for fiscal 2016, it retained its earlier guidance for 10% to 12% annual revenue growth in constant-currency terms.
Infosys faces challenges in the form of currency fluctuations, pricing pressure and executive departures. The company's former CFO resigned last month.
Based on the above discussion, management guidance and our own estimates, we estimate Infosys's fiscal 2016 revenue will be $9.19 billion (vs. $8.711 billion for fiscal 2015) and the operating profit will be $2.298 billion (2015 operating profit was $2.258 billion). Our estimates are conservative and assume 5.5% year-over-year growth in sales and a margin for earnings before interest and taxes (EBIT) of 25%. Please find below the table showing these estimates:
Source: author's own calculations
Lets have a look at the stock valuation based on its price-to-sales ratio.
From 2013 through 2015, Infosys has traded at an average price-to-sales ratio of 5.0. Based on this ratio and on estimated 2015 revenue, we have calculated a stock price target of $21. The calculations are shown in the table below:
Source: Author's own calculations
Based on fundamental analysis and the above discussion, we set a buy recommendation on Infosys with a six- to 12-month price target of $21.