2023-08-14 13:00:07 ET
Summary
- ePlus stock saw a notable 15.2% increase after Q1 2024 earnings report exceeded expectations.
- The company exhibited robust growth in revenue and profit, driven by organic expansion and acquisitions.
- Even though the stock has already reached my earlier estimated intrinsic value, the revision of analysts' EPS projection has heightened the potential for further upside.
- This development has solidified my decision to maintain a "buy" rating.
Introduction
ePlus ( PLUS ) stock made a robust move after the Q1 2024 earnings announcement , concluding the day with a notable 15.2% increase. Despite its remarkable 44% surge within a mere 11 months since my previous discussion on ePlus, I remain optimistic about its future potential, although the margin of safety undeniably has shrunk.
ePlus Inc, headquartered in Herndon, Virginia, is an American company specializing in IT asset sales and financing. As a technology solutions provider, ePlus offers a comprehensive range of professional and managed services focused on cloud computing, security, data centers, and digital infrastructure. With a global presence, ePlus and its subsidiaries play a pivotal role in delivering information technology solutions that empower organizations to optimize both their IT environments and supply chain processes.
Operating across two distinct segments—Technology and Financing—ePlus provides a diverse array of offerings. Within the Technology segment, ePlus delivers hardware, subscription and perpetual software, software assurance, maintenance, and a spectrum of both in-house and outsourced services.
In the Financing segment, ePlus engages in various financing arrangements such as sales-type and operating leases, loans, and consumption-based financing structures. Additionally, this segment handles underwriting, management, and disposal of IT equipment and assets.
Q1 2024 Earnings
ePlus exhibited robust growth across its business, surpassing expectations significantly on both the revenue and profit fronts. The top-line figure reached $574.2 million, showcasing a remarkable 25.3% year-over-year growth, which exceeded projections by a substantial $78.43 million. This growth was primarily a product of organic expansion, complemented by the remaining one-third stemming from recent acquisitions.
Management attributes the notably elevated organic growth to improved product availability, enabling the timely completion of specific customer projects that had been scheduled for later. Particularly robust demand emerged from what the company categorizes as the mid-market segment, encompassing customers with 500 to 10,000 employees. This segment demonstrated strong interest in AI, cybersecurity, and technological modernization, driving these tailwinds.
A strategic shift in the customer mix toward higher-margin solutions played a pivotal role in achieving the impressive profit outcome. The first quarter witnessed a Non-GAAP EPS of $1.41, outstripping analysts' forecasts by $0.39 and exhibiting a year-over-year growth of 51%.
For the first time, the company offered forward guidance, reflecting management's confidence in the visibility of their pipeline and backlog. During the Q1 2024 earnings call, CEO Mark Marron expressed, that guidance is kept a little reserved but that they feel very good about the guidance.
In terms of outlook, management anticipates FY 2024 revenues ranging from $2.23 billion to $2.33 billion, suggesting likely annual revenue growth of 12%.
The company's net income has surged beyond the pace of revenue growth, facilitated by setting a new high in the profit margins. This trajectory has further elevated the return on equity, reaching an impressive 17%. Notably, all earnings are being reinvested, slightly exceeding the decade-long average of around 15% ROE.
Valuation
Even though the stock has already reached my earlier estimated intrinsic value of approximately $65, I am refraining from assigning it a lower rating. This decision is motivated by the robust growth observed in the preceding quarter, leading analysts to revise their FY 2024 EPS projection to $5.26.
The original intrinsic valuation calculation I conducted was based on an EPS of $4.35. Remarkably, within just 11 months, this EPS estimate has been significantly raised. As elaborated in my prior article, the intrinsic valuation derived from the company's modest debt levels and consistent EPS growth suggests a potential earnings multiple of around 15. At this multiple, the share price translates to $76, a notable increase from the earlier estimate of $65.
I maintain the belief that a price-to-earnings ratio near 15 is appropriate for a company that consistently achieves annual growth of 15%. This outlook provides a satisfactory margin of safety. Evidently, the market seems aligned with this perspective over the long term, as ePlus' average P/E throughout the preceding decade has been 14.5. Consequently, the company seems to be positioned on the favorable side, offering approximately 15% upside potential toward its intrinsic valuation.
Stock Chart
Quick disclaimer: A technical analysis in itself is not a good enough reason to buy a stock, but combined with the company's fundamentals, it can greatly narrow your price target range when investing.
As the stock price continues to distance itself from its 50-month moving average, the idea that it's no longer significantly undervalued gains further support. I would only regard it as undervalued with a substantial margin of safety if it were to dip below the moving average. Considering the recent impressive earnings beat, a near-term regression to this moving average seems improbable. Nonetheless, history suggests that such a reversion is likely to transpire again over time.
Final Thoughts
Although the stock currently stands notably above its 50-month moving average, I remain convinced that a satisfactory margin of safety persists. This conviction stems from the combination of a lower-than-average earnings multiple and a track record of robust and consistent intrinsic growth, which should translate into annual double-digit returns of around 15%.
The recent earnings report bolsters this conviction, as it demonstrates growth that surpasses the company's average growth rate. While a portion of the earnings outperformance can be attributed to the improved product availability that led to timely project deliveries, the subsequent guidance indicates that growth will persist. This trajectory keeps the well-established pattern of annual double-digit EPS growth on course.
In light of these factors, I am reaffirming my "Buy" rating.
For further details see:
ePlus: Q1 Earnings Reinforce 'Buy' Rating Despite Upsurge In Stock Prices