EPAM Systems No Longer Attractive For Putting New Money To Work, BofA Says

EPAM Systems Inc EPAM is a well-positioned IT Services vendor, but faces headwinds such as tougher comparison and adverse forex impact, according to an analyst at Bank of America Merrill Lynch.

The Analyst

Analyst Jason Kupferberg downgraded EPAM from Buy to Neutral but increased his price target from $134 to $147.

The Thesis

Tough comps and forex are likely to impact EPAM's revenue growth in the second-half, Kupferberg said in a Tuesday note. The analyst expects reported and constant-currency organic growth of 21 percent and 21.7 percent, respectively, compared to 27.8 percent and 25.2 percent in the first half.

The analyst also noted that hiring environment has become challenging, with the company acknowledging a quarter-over-quarter increase in employee attrition in Q2.

"Especially within EPAM's core delivery markets (such as Belarus and Ukraine), we believe competition for top engineering and Digital skills remains fierce," Kupferberg said.

The analyst sees supply of manpower limiting revenue growth going forward, as the company grows larger, necessitating an increase in the absolute number of net new hires. In order to maintain differentiated competitive profile, the analyst said, the company has to actively invest in business. Accordingly, EPAM is prioritizing revenue growth over margin expansion, he added.

BofA sees EPS growth modestly lagging revenue growth for the foreseeable future, hindering multiple expansion. The firm noted the valuation of shares appears full and therefore, isn't attractive enough for putting new money to work.

The Price Action

EPAM shares have gained over 33 percent in the year-to-date period, trading around $142.63 at time of publication.

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