Share tip of the week: IT firm for tough times

published 15 January 2010

One industry that has done well out of the credit crunch is the insolvency sector. Small wonder. In the US there were 1.4 million new bankruptcy filings in the year ending September 2009, according to the Administrative Office of the US Courts. That's up 34% on the year before.

Enter Epiq Systems. It's the world's largest provider of IT and back-office support to liquidators and the legal profession. The firm is engaged on hundreds of bankruptcies, including high-profile defaults such as Lehman Brothers. These contracts are often complex, multi-year assignments that provide excellent income visibility. Epiq's applications significantly improve the speed, efficiency and quality of conducting insolvency, litigation, forensic accounting and other regulatory work.

The group also offers software in the growing areas of electronic discovery and claims management. These offer both time and cost savings for its clients, and also generate full documentary evidence backed-up by recorded audit trails, so the work can be submitted to the courts.

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Epiq Systems (Nasdaq: EPIQ), rated a BUY by Wells Fargo

Wall Street expects 2009 turnover and underlying earnings per share (EPS) of $213m and 68 cents respectively, rising to $224m and 83 cents in 2010. That puts the shares on p/e ratios of 19.2 and 15.7. I'd value the group on a ten times earnings before interest, tax, depreciation and amortisation (Ebitda) multiple. After adjusting for the $27m in net debt, this delivers an intrinsic worth of about $17 a share. What's more, I suspect these estimates will be beaten, especially if there's a double-dip recession.

So what are the possible snags? Epiq is exposed to the usual risks (such as lumpy orders) related to large assignments, along with the generic issues involved in working on high-profile legal cases. But the shares are modestly priced compared to rivals such as Autonomy, which trades on a 2009 p/e of 26.2, and they also provide downside insurance in the event of another equity market rout. Fourth quarter results are due in late February.

Recommendation: BUY at $13.10

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.