I began this series with an interactive discussion of First Marblehead (FMD) as a candidate for investment. The objective is to work through the Stock Selection Guide (SSG), using Toolkit 5, until the stock proves unsuitable, or we can reach a decision. Along the way, I intend to review what information might be available to indicate suitability, from other sources as well. The results suggested a 'watch and wait' for FMD. This time, we'll take Infosys Technologies Limited (INFY). Unfortunately, Mr. Seger beat me to it, but I'll forge ahead with “my own homework” for a bit. You could compare to his workup as well, just for grins.

Keystrokes will be shown as ((Alt)) + ((letter)), where that applies. Uniform Resource Indicators or Locators (URLs) will be given completely where possible; if not, the http:// is implied. Acronyms are explained the first time they're used. The usual disclaimer applies. This is a discussion for learning only; no recommendations for investment are implied or intended. You make your own decisions. I'm doing this to learn how to use the tools intelligently, and appreciate any constructive feedback.

Why this stock? INFY surfaced as a candidate in about three of the screens I use, and was discussed in a couple of the services I watch. A quick first-look showed very interesting patterns, so off we go. Its sales are around USD$4 billion, so it's upper-mid-range in size. That means I'm seeking growth rates somewhere greater than 10% per year, for the last five years.

What do they do? According to the info on Microsoft's service (http://moneycentral.msn.com/investor/home.asp), “Infosys Technologies Limited (Infosys) is a global technology services firm that defines, designs and delivers information technology (IT)-enabled business solutions to its clients. The Company provides end-to-end business solutions that leverage technology for its clients, including consulting, design, development, software re-engineering, maintenance, systems integration, package evaluation, and implementation and infrastructure management services.” Of note, INFY is based in India, so gets some of the “international” flavour to a portfolio. However, the large software and business companies that would use them are based in the West, the US and Europe, so severe market conditions will “transfer” to INFY.

Now I checked the listing on Reuters, and selected the Ratios link to take a quick look comparing it to the rest of its industry. The P/E ratios seem a bit higher historically than the industry, but it is currently low, compared to the industry. The gross margin is about half the industry's, but the pre-tax profit margins (PTP) run a bit higher than the industry. The quick and current ratios are much higher than the industry, so it's in solid financial shape. Better yet, the return on assets (ROA), investment (ROI) and equity (ROE) are all higher than the industry.

Let's turn to the Microsoft Research Wizard and get some background.

How has the market treated that sector recently? The market overall is down. The company has been on a roll for several years, but the stock is down 20% now, with the sector down about 21.7%, so the stock is doing a “bit” better than the sector. The price is down 28+%, suggesting a closer look. Bigcharts shows the price from around 55 down to about 37 over the last year. The question is: “why” and is it due only to the market overall?

Pulling up the SSG, and taking a look at the Side 1, a quick look at the “visual analysis” portion (the graph) shows an outstanding, “railroad track” pattern. Barbed-wire fence #1: passed.

We see year-over-year figures (Recent Quarterly Figures) that are positive and above expectations. Barbed-wire fence #2: if the year-over-year figures are negative, stop, and move on to another candidate. This again passes well. The figures are high enough that they may not be sustainable, so some careful consideration is appropriate. With earnings up, sales up, and price down, we're still “cleared” to proceed.

Pulling the Value Line sheet, we can fill in some data: Insider ownership is

The price is approaching the 52-week low. That may be interesting, and I'd like to use a lower price later, just for insurance.

Looking at the estimated growth rates for sales and EPS, analysts are estimating 20% growth for EPS. Sales historical growth is 40%, and EPS at about 40%. I clicked the background of the image and brought up the adjustment window, then Viewed Historical Growth. While there, I checked the r-squared (or predictability) values for sales and EPS growth, which were 0.98 and 0.93, indicating very predictable historic growth. I capped the growth at 20% as the “tribal wisdom” suggests.

More recent years appear worth weighting a bit more than the early years, if the company has more than five years data, but reflect well on the company.

Just for grins, using the ((Alt))+((R)) keystroke to bring up the “preferred procedure” as a sanity check, I see 19.4% compound annual growth rate (CAGR) for EPS. This suggests the estimate of 20% sales and 20% EPS may not be too far off. At least one investment club refuses to use “preferred procedure” figures as they found them less predictive than “recent five years” figures.

A quick check of the “sustainable growth rate” with ((Alt))+((S)) shows a purported “sustainable” growth rate of 32.3%. That seems too high, so I'll stick with capped 20% for both sales and EPS.

So, conclusion from Side 1: Looking good so far. Let's make sure we check for why the price is depressed.

Side 2:

A quick look at Section 2 of the SSG shows lines A and B are even and up, respectively, a good sign. The pre-tax profit (PTP) and return on equity (ROE) seem to be about 30%, with some variability. Using ((Alt))+((R)) we can change the ROE to use end of the year figures, and see similarly the ROE is up.

Using ((Alt))+((D)) we can check the debt-to-equity level on the company, and it is flat even at zero, consistently, an excellent sign. This checks against the Reuters and Microsoft data.

Looking at Section 3, we see a P/E ratio calculated at a default of 48.8 high and 24.5 low. We can check Line 4A's figures by clicking on the green box. The historical figures are shown. Using ((Alt))+((M)) to remove the “inconsistently high” or top-half of the figures gives a P/E of 48.7 and 23.2. Both of those seem high to me, so let's cap them at 30 and about 19, for max and min, reflecting the highest and the “market” level respectively.

Now, what “low price” to use? Well, recently the stock has been punished, along with the rest of the market. Therefore, we need to select something below what it is today as a “conservative” estimate. I selected the (a) as the “forecast low price”, then the Price the Dividend will support (d), as a “low price” it could get down to, to start the work with. Then I checked “other” and used ((Alt)) + ((R)) to find the “rational” price. Of these, the Dividend price was lowest, so I checked that, and then the U/D ratio.

That gives an U/D ratio of 4.9, which seems reasonable. However, the Price to Earnings ratio compared to the Growth rate (PEG) is at 78, which seems low. And, the relative value (RV) is at about 51%. These two indicators suggest other investors are not as supportive of future value as I might be; therefore, caution is indicated. 

Aquick look at the projected average return and the estimated total return has returns in the 27% to 32% levels.

The “conventional wisdom” is that the worse a company is performing, the better it appears on Side 2, and this looks pretty good to me. Therefore, let's make sure we do our homework.

Launching TakeStock4, and entering the symbol, we get a Quality Index of 95, a recommendation to “buy”, and a caution to check why investors are “losing interest” (which checks against the PEG and the RV). The buy price is listed at 46.41, which compares to 46.73 on the SSG. Without going through the whole form, it echoes the findings in the SSG, with a more conservative returns (projected and average), which are still quite nice.

Firing up a browser, and turning to Reuters for more information, as we need to dig deeper:

Checking Key Developments: We see several apparently favorable business deals, and at least one big customer selecting them as a “preferred provider”.

Checking insider trading on Reuters, we see nothing available at the moment, possibly because it's foreign-owned. Checking the estimates on Reuters, things look OK, but the P/E for 2009 is about 15, BELOW what we estimated above. That suggests maybe a more conservative look yet, just for insurance.

Conclusions for now: Looking pretty good, but perhaps a more conservative look is in order, given the depressed estimated P/E for the next couple of years. I'd say a “buy”, definitely a “hold”.

The usual disclaimer applies. This is a discussion for learning only; no recommendations for investment are implied or intended. You make your own decisions and really should do your own research. I'm doing this to learn how to use the tools intelligently, and appreciate any constructive feedback.