Pries Capital – An Investment Firm rates QUALYS INC (QLYS) a BUY.
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This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses and should give investors a better performance opportunity than most stocks we cover. The company’s strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, compelling growth in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. We feel its strengths outweigh the fact that the company has had lackluster performance in the stock itself.
Qualys, Inc. is a provider of cloud-based security and compliance solutions. The Company’s solutions enable organizations to identify security risks to their information technology (IT) infrastructures, help protect their IT systems and applications from cyber-attacks. Its suite of security and compliance solutions delivered on its Qualys Cloud Platform enables its customers to identify their IT assets, collect and analyze IT security data, discover and prioritize vulnerabilities, recommend remediation actions and verify the implementation of such actions. Its Qualys Cloud Platform consists of a suite of IT security and compliance solutions. The Qualys Cloud Suite includes solutions, such as Vulnerability Management, Continuous Monitoring, Cloud Agent, AssetView, ThreatPROTECT, Policy Compliance, Payment Card Industry Compliance, Security Assessment Questionnaire, Web Application Scanning and Web Application Firewall. It provides its solutions through a software-as-a-service model.
The data shows strong and consistent growth of sales and EPS. Historical growth exceeds the 12% growth we expect for a small size company. Percent pre-tax profit on sales is steady over the last 5 years, averaging 18.4%. Percent return on equity has increased over the last 4 years to 18.2% in 2019. Qualys carries a low debt to capital of 11.8% in 2019 against the industry average of 44.7%, implying that there has been very successful management of debt levels.
The company markets and sells its IT security and compliance solutions to customers directly through its sales teams, as well as indirectly through its network of channel partners, such as security consulting organizations, managed service providers and resellers, and consulting firms. It serves enterprises, government entities, and small and medium-sized businesses in various industries, including education, financial services, government, healthcare, insurance, manufacturing, media, retail, technology, and utilities.
Our forecasted growth rate for sales is 11.1%, some analysts’ forecasts for sales growth range from 11% to about 16%, and we selected a growth rate in the low of this range to be conservative. The company has grown sales and net income during the past quarter when compared with the same quarter a year ago, however, it was unable to keep up with the growth of the average competitor within its subsector. The selected rate is supported by the historical growth and the various analyst estimates found in the research process.
Our forecasted growth rate for earnings per share is 17.8%, a little conservative against the current 22.6%, but better than the five-year average sitting at 15.5%. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue.
Our forecasted high P/E is 52.4 below the average high P/E of 67.7. We reviewed the five-year history and took out 2015 as an outlier. We selected 52.4 as it has just been the average price earnings ratio and given the backdrop of the most recent macro conditions, we have been lowering future growth expectations across the board.
Our forecasted low P/E is 37.1, right in line with the average low P/E for the last four-years. Similarly, to the forecasted high P/E, we took out 2015 as an outlier in the metrics. Going back to our judgments into the future, as we have been lowering future growth expectations across the board, we do not believe the underline is deteriorating.
Our forecasted low price is $62.30. This value was selected from the 4B(a) calculation (Average low P/E times Low EPS) as the forecasted low price. The low EPS is adjusted to the most recent 4 quarters of EPS. The calculated value of $62.30 provides a reasonable margin of safety below the current price ($71.35).
- At the current price, the stock is a BUY
- At the current price, the upside-downside ratio is 14.2:1
- Compound Annual Return (using forecast high P/E) is 22.8%
This report is for information purposes only and should not be considered a solicitation to buy or sell any security. The final recommendation is always to do your own research, complete your own stock to study and make sure you are comfortable with your forward-looking forecasts before making any buy or sell decisions. Neither Pries Capital nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of Pries Capital, Inc. Copyright(c) 2011-2020. All rights reserved.
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