5 Fast Growing Small Caps To Watch
Jae Jun | Mar 27, 2013 02:18AM ET
This is a continuation of filtering through Download the PDF dashboard for Allegiant Travel.
#15 Syntel (SYNT)
Finding Syntel is a pleasant surprise. The business centers on outsourcing their skills to global companies as opposed to outsourcing staff to companies which is a much lower margin business.
In a nutshell, Syntel will develop custom software applications according to a customers specifications related to their business.
There are plenty of these companies all around the world, but it is surprising to see how Syntel has achieved such success in such a competitive field.
Highlights
- Surprised to see Syntel posting increases in revenue for the past 10 years even during the recession
- Strong gross margins averaging 43% over past 5 years and net margin averaging 23%
- Has grown book value for 7 years without any debt
- A big cash flow generator
- Excellent ROE of 32% and CROIC of 100%!
- Strongest among competitors INFY, IGTE, CTSH and WIT
- Lots of accruals in the balance sheet and cash flow statement. A high balance sheet accrual also leads to a high ROE.
- Low Piotroski score of 5
- Dividend yield is a tiny 0.36%
- Highly dependent on a small number of customers
- Just by looking at the company quickly, the numbers can look too good to be true
With such strong fundamentals and exponential growth to date, how do you go about valuing a company like SYNT?
It obviously has excellent numbers but would I confident in assigning a growth rate of around 20% going forward?
If I’m going to assume an aggressive case of 20% growth, then the valuation I get is around $130 using the DCF method, $136 using the Graham formula and $100 with the Absolute PE method.
That’s about a 80 – 100% upside from current prices.
Other competitors are of lower quality but priced higher, so if you do a relative valuation, the fair value is around $80.
Doing an EBIT valuation which only looks at a maximum of one year going forward, the valuation range is between $32 to $72.
That’s a wide valuation range, and at this point, I’d rather keep an eye on it to see what a normal operating business level is as opposed to riding the wave up not knowing when it is going to end.
That goes for the rest of the stocks mentioned here. High flying companies that are operating at its peak so there could be a chance that it will come down at which point it would be a very compelling investment opportunity.
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