STOCK STUDY WORKSHOP SECTIONS 1 & 2 OF THE SSG
INFOSYS TECHNOLOGIES LIMITED (INFY)
Ralph Seger, CFA
VISUAL ANALYSIS OUTLIERS AND PROJECTIONS
The prime consideration of selecting a growth stock to analyze using the SSG is that the visual analysis MUST show steady growth of sales, pre tax profit and EPS that have a reasonable opportunity of continuing. The judgment of the future P/E ratio must show a reasonable relationship to the judgment of the growth of EPS. The P/E must be reasonable to the point that it does not discount favorable results so far into the future that it also discounts the hereafter. On the semi log form of Section 1 INFY shows both a desirable growth pattern and the relationship of the vertical price bars to EPS that suggests a reasonable P/E ratio.
[Note: A PDF file that shows Ralph Seger's SSG is attached to this message.]
Since growth does not necessarily go on forever and this company is 25 years old I have reduced the future expected growth of sales, pre tax profits and EPS to 20% annually. When I compare actual growth to the 20% expected growth using the PERT report I will not be alarmed if actual growth slacks off from the 40% actual to a more reasonable 20%.
The fiscal year ends in March so my projection of expected growth is from nine months ending December 2007, annualized, to five years into the future. This estimate suggests sales of $9.7billion and EPS of $ 4.81 five years in the future. Thus of the two important elements of expansion of a P/E ratio and growth of EPS, I see an opportunity for substantial growth of EPS.
[Some readers might find the projected trend line on Ralph's SSG Visual Analysis to be a bit puzzling. The projected line doesn't begin at the last data point, and it ends at the end of 2007. This graph is correct, because this is the way that Toolkit shows the projection a full 5 years into the future.
Ralph set the graphing options to start the projections at the end of the most recent quarter. If you mentally slide the projected trend line to the right, so that it overlaps the last quarterly data point, you will see that the trend line starts at the right value, and that the projection is for 5 years.]
Investor's Toolkit inserts the annual high and low price range into section 3, more about this in he next session.
Pre-tax profit as a of Percent sales is displayed in Section 2, Evaluating Management, Investor's Toolkit makes the calculation and displays the results in Section 2-A. I note that the pre-tax profit margin has consistently been in the double digit range of approximately 30% for the last eight years. When I look a PERT-A I note that this favorable level has persisted through December 2007.
Percent earned on equity capital, in Section2-B, (net income as a percent of equity capital or of EPS as a percent of book value per share) have averaged 30.7% and aside from a slip to 28.3% in 2003 has been very consistent. This means that the equity capital entrusted to the management by the share owners has produced returns well above the average company. Based on these two measurements I conclude we have a well managed company. This is especially so since the balance sheet is not leveraged with debt. If either if the two metrics had been declining I would have stopped my analysis and evaluation of the stock under consideration.
[You can double check these values, plus look at other data drawn from INFY's financial reports by looking that the Ratio Analyzer report also here at StockCentral.]
Tomorrow I will continue exploring the Stock Selection guide for INFY. In the meantime, please ask any questions that you might have.
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