This month, the Investment Advisory Service chose Infosys (INFY) as one of its three featured stocks. IAS is a pay service from ICLUB Central that provides subscribers with three completed SSGs and commentary each month that are prepared by professional money managers using NAIC/BI methods.

Infosys is a well-respected Information Technology outsourcer that is based in India where salaries are lower than in the U.S. and where there are many college graduates who speak English as well as other languages. The company just announced that its Sales rose 37% and EPS rose 33% during its recently completed quarter, but the news reports that its stock price declined 7% on the day of announcement. 

INFY’s Pre-Tax Profit Margin and Return on Equity, last annual as well as 5-year average, all exceed industry averages at Reuters (Software & Programming Industry, 493 companies) and at MSN Money (Technical & System Software Industry, 33 companies).  At MSN, INFY is highest on both 5-year measures.

Most analysts are estimating EPS around 24-25% for the next 5 years with Value Line low at 22.50% and Reuters high at 25.80%. FactSet, First Call and S&P are all estimating 25.00% exactly, and Zacks is close at 24.44%. Reuters less one Standard Deviation is 21.61% (25.80 – 4.19) and is the approach I use most often.

IAS estimated Sales and EPS growth at 20.00% each, considerably less than the other analysts, and High and Low PEs at 30.0 and 20.0. IAS explicitly mentioned that it was limiting its High PE to a maximum of 30.0 and I think it also limited its EPS Growth to 20.0% maximum, just like Take Stock does.

I’m not a fan of imposing arbitrary limits on SSG analysis as that treats all high growth stocks alike. INFY’s 5-year historic Sales and EPS growth rates were a whopping 40+% according to S&P.  Value Line, whose 5 year EPS estimate is the lowest of all analysts, is still 2.50% more than IAS.  Even Reuters less one Standard Deviation at 21.61% is more than the 20.00% ceiling imposed by IAS and Take Stock.

Still, even with its arbitrary limits, IAS’s analysis on 9-12-07 resulted in a SSG Buy with a 3.8 Upside/Downside Ratio and a 19.8% Total Return.

With regard to the Forecast Low EPS, SSGers have a key decision to make: either use the default value which is the last fiscal year of EPS or use the last 4 quarters of EPS (the Alt-Q option in Toolkit 5). I was surprised that IAS used the default value of $1.50 instead of Alt-Q value which was $1.64 when its original SSG was completed.

The difference between the two values became even larger after I updated IAS’s SSG on 10-15-07: now, another quarter of data has been added and the Alt-Q value became $1.77. As a result, the Upside/Downside Ratio was 4.7 whereas it would have been 3.4 after updating but without Alt-Q.

Like IAS, Take Stock limited its EPS growth to 20.00% and its Hi PE to 30.0. However, unlike IAS, Take Stock used 15.2 for its Low PE which resulted in a 2.7 Upside/Downside Ratio which does not satisfy the SSG Buy criteria. For comparison purposes, I had to calculate the U/D as Take Stock does not use that concept.

I estimated EPS growth at 19.00% and also used Alt-Q for the Low EPS.  My SSG resulted in a 3.7 Upside/Downside Ratio and a 20.3% Total Return.  Moreover, I would be comfortable estimating EPS growth up to 21.00% as that would lead to a Forecast High Price that did not exceed Value Line’s estimated High Price which I consider one indicator of reasonableness.

FOOD FOR THOUGHT:

(1) Is INFY currently a solid SSG Buy with a 3.7 - 4.7 U/D or, according to Take Stock, a not-close-to-a-SSG-Buy with a 2.7 U/D?

(2) Are there any good reasons NOT to use the last 4 quarters of EPS (Alt-Q) as the Forecast Low EPS, either with regard to INFY or with most growth stocks most of the time?

* This includes a price and data update of IAS’s original SSG, and I also used the last 4 quarters of EPS for the low EPS (Alt-Q) instead of EPS for 2006, the last full fiscal year.  In other words, I used $1.77 instead of $1.50.

- Armin Fields