May 25, 2021
[11 min Read]
A simple google search of the following phrase “Supply Chain Shortage” yields over 3.65M results in a little over a quarter of a second. The headlines that come up from this search are very worrying and are not limited to a single industry (ie. Chips or semiconductors). Instead, we get a variety of headlines that read, “Semiconductor Shortage Shines Light on Weak Supply Chain” or, “Pallet Shortage Adds New Wrinkle to Pandemic Supply-Chain Issues” or, “Global Chip Shortages, Supply Chain Woes Leading to Tech Infrastructure Inflation” and finally, “Gas Shortage from Colonial Pipeline Shows a Fragile Supply Chain”. None of these headlines are from the same industry, product supply shortage, however they all have one underlying issue, which is their supply chains.
In an interview with Hank Canitz (VP of Nulogy (a supply chain software company)), he stated that,
“For years, the manufacturing industry has been focused on cost cutting and efficiency by implementing just-in-time manufacturing processes and operating with as few outside partners as possible while still meeting demands. The COVID-19 pandemic exposed how brittle global supply chains had become. Low cost and efficient supply chains have a difficult time responding to change and recovering from disruption. Although the effects of the pandemic only represent a small percentage of any global supply chain's risk, the increase in demand and supply variability caused parts and materials shortages, shipping delays and rising costs. The pandemic was the final straw that broke many global supply chains making it extremely difficult for manufacturers to fulfil orders using the supply chain they currently had.”
With COVID-19 causing numerous supply chain shortages, there is an increasing imbalance between the levels of supply and demand for many manufactured products. This imbalance has been leading to drastic price increases and price gauging, the best examples of this come from toilet paper & hand sanitizer early on in the pandemic, the current inflation of lumber prices, and the absurd prices in the real estate market. As a result of this madness, supply chains and supply chain management have become very important, and in a recent study of the supply chain management, experts estimate that the supply chain management software industry will grow at a CAGR of 11% over the next 5 years, which highlights the importance and grow of this market post COVID-19.
All of these macroeconomic factors are favourable for companies like ePlus, who offer supply chain software solutions. Furthermore, knowing that ePlus invests and tries to stay in front of industry trends could be favourable if there is any news about them integrating blockchain technology into their supply chain software as this market is poised to grow at a CAGR of 81.7% between 2021-2026, however there is no news about this, and there are no indications currently that they are even contemplating it. However, it will not surprise me if they make an announcement that they would use blockchain technology as they are known to adapt and stay ahead of trends. One company and one crypto that use blockchain technologies in the supply chain are Treum (company), and Origintrail (cryptocurrency).
ePlus is a leading solutions provider that delivers actionable outcomes to companies by using both IT and consulting services to help drive business innovations.
ePlus assesses, plans, delivers, and secures solutions that are compromised of leading technologies, consumptions models that align with their clients needs. ePlus is able to create optimized solutions to improve costs, scale, and efficiency of private, public, and hybrid clouds in today's evolving market.
Furthermore, ePlus offers consulting, professional services, IT staff augmentation, and management services. Their management services include security, cloud, networking, data center, collaboration, and emerging technologies to help a business in all aspects.
ePlus understands their customers needs, and tailors their services in order to best design, deploy, and manage solutions that aligns with the needs expressed by their customers. The main goal of ePlus is to help their customers gain more control over their supply chains through optimizing/automizing the management of their assets.
ePlus has continuously re-invested into improving their technology and engineering resources to stay in front of emerging technology trends. ePlus aims to provide a unique customer experience, fast delivery of their services, and superior management and upkeep of their services.
ePlus' market strategy is to target clients that are considered middle to large enterprises, who could benefit from using their software.
ePlus has broken their revenue by industry, and the results are as follows:
In ePlus' SEC filing they highlighted their competitive strengths. The most important of these strengths include:
Furthermore, in the SEC filing they also gave investors information about their growth strategy, this strategy consists of:
I found this figure on a website called tracktak, which provides information about companies when conducting a DCF model.
CAGR (DCF #1):
I found this CAGR of 9.9% through ePlus' SEC filings, in which they reported that their gross profit increase by 9.9% YoY.
CAGR (DCF #2):
I found this CAGR of 21.87% through ePlus' SEC filings, in which their adjusted EBITDA growth rate over the past 5 years equalled 21.87%.
Interest Expense Growth Rate:
In order to arrive at the interest expense growth rate, I found the CAGR of their interest expense between 2016-2020, which cam out to be 9.69%.
In their SEC filings, they reported that their effective tax rate for 2020 was 28%.
Investment Valuation and Plan:
In order to properly value ePlus I underwent 3 comparable analyses, as well as 2 DCF models.
In this DCF I used the 9.9% CAGR, as well as the other information found in the “Valuation information” section of this report. This DCF model was the more pessimistic outlook, and implied a share price decrease of 31.96%., this would translate into a share price of $63.06 (current price is $92.68). However, since I found 2 different CAGR's I decided to undergo another DCF to compare the results.
In this DCF I used the 21.87% CAGR, as well as the other information found in the “valuation information” section of this report. This DCF model was the more optimistic of the 2 models and implied a share price increase of 15.94%, which would translate into a share price of $107.45 (current price $92.68). The results achieved in this DCF model are drastically different from the past DCF model, so I decided to average the results to get a relatively unbiased valuation.
DCF - Average:
As previously mentioned, I decided to take the average price of the 2 DCF models conducted. By doing this I got an average valuation of $90.06 per share, which implies a downside of 2.82%. In order to get information to prove or disprove this valuation I decided to undergo 3 different comparable analyses.
This multiple is commonly used in investment analysis and is standard practice if the information is available. By comparing their EV/EBITDA multiple to ePlus' competitors, (listed above in the “competitors” section of this report) the estimated fair value of $PLUS is $104.81 which implies an upside of 13.09%. This is quite reasonable and is relatively close to the results achieved in the DCF model even though one of them implied $PLUS is overvalued and the other implies that it is undervalued.
This multiple is often used in acquisitions, which we know ePlus has plenty of past experience with through the completion of 28 acquisitions. By comparing ePlus' EV/Revenue multiple to their competitors I arrived at a fair value per share of $391.23, which implies an upside of 322.13%. This is absurdly high, and thus I decided to void this result from the average comps price estimate.
P/E is another very common multiple, and I decided to observe this multiple to get a better idea of a proper valuation of $PLUS through comparable companies. I arrived at a fair price per share of $115.84, or an upside of 24.99% using this comparable. This result was both reasonable and consistent with the result achieved in the EV/EBITDA comparable.
Comps - Average:
In order to put one all encompassing price estimate by looking at comparable companies I decided to take the average of the EV/EBITDA, and P/E multiples. As you may have noticed I decided to factor out the EV/Revenue multiple because the result was an outlier. By doing this I achieved an average price target of $110.32.
In order to get the most out of this investment, you would need to enter a position between $90-93. Anything higher than this limits upside and make thee investment significantly riskier, and anything below this price point would be a strong buy.
I would look to exit my position somewhere in the middle of both the valuations, this would be between $101-104. This price is constant with many analysts who have a median price target of $102/share. Selling at between these levels (given an entry at current price ($92.68)) would yield an upside of 8.98-12.21%.