Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
I just flew back from Russia on Tuesday. Imagine my surprise, then, to learn shortly after arriving that Swiss megabanker UBS has just upgraded Qiwi plc (QIWI 9.88%) -- the very same stock that I named my top Russian pick back in January.
Why does UBS love it? I've got a theory.
Fresh Qiwi -- from Russia!
Let's begin with a quick refresher course on just what Qiwi is. A specialist in online and mobile electronic payments, Qiwi owns and operates a network of 113,000 e-payments kiosks throughout the Russian Federation, Kazakhstan, Moldova, Belarus, Romania, and the United Arab Emirates. Running its proprietary software, these kiosks permit customers to make money transfers online, pay utility bills, and conduct other financial transactions. Qiwi also offers "virtual wallet" and prepaid debit card services to its customers.
Although technically a Cypriot company (Qiwi incorporated in Cyprus in 2004) and listed on the Nasdaq (in 2013), Qiwi still does most of its business in Russia. According to data from S&P Global Market Intelligence, fully 74% of the company's revenue comes from Russia -- and essentially all of its assets are located there.
The company derives a further 5% of revenue from countries that used to be part of Russia (actually, the USSR), now known as the Commonwealth of Independent States.
Now, for obvious reasons, Russia is not the most popular place to invest these days. And yet, Qiwi is pretty high on UBS' list. UBS upgraded the stock one notch to buy, and increased its price target by 28% to $24.50 per share this morning.
Why would it do that? Unfortunately, StreetInsider.com (requires subscription) doesn't have much detail on the upgrade that it can share with us. Still, it seems logical to guess that today's upgrade has something to do with Qiwi's fourth-quarter earnings report, which incidentally came out just last week.
Let's see what the company had to say there.
Sales up, profits down
In a report replete with mixed messages, Qiwi confirmed last week that its sales in 2017 grew 24% in comparison to 2016, hitting a new high of 13.2 billion Russian rubles (RUR), or $363 million in U.S. dollars. That growth rate accelerated in Q4 2017 in particular, growing 46% year over year.
Adjusted net profits, on the other hand, declined steeply within both the annual and quarterly time periods, falling 14% in RUR terms for the year -- and 32% for the quarter.
That sounds bad, but Qiwi explained that the decline in profits came primarily as a result of investments the company made to accelerate its growth -- including increased hiring at the company, combined with "expenses incurred with the acquisition of assets of Tochka and Rocketbank from Otkritie Bank" (also supporting growth), and also higher income tax payments.
Moreover, TheFly.com confirms that the numbers Qiwi reported for the quarter exceeded analyst expectations on both sales and earnings -- and by pretty significant margins.
In short, if UBS is enthusiastic about Qiwi today, it's possibly because the company thoroughly exceeded expectations last week. Still, before investors follow UBS' advice and buy Qiwi this week, it behooves us to take at least a quick look at its valuation.
Luckily, the numbers here are pretty easy to digest. Over the past year, Qiwi reported GAAP profits of $54 million, and free cash flow (FCF) actually a bit ahead of that number -- $55 million. Weighed against the company's $1.2 billion market capitalization, and adjusted to reflect Qiwi's more than $300 million in net cash, the company sports an enterprise value (EV) of almost exactly $850 million. Thus, both the company's debt-adjusted price-to-earnings ratio, and its EV/FCF ratio, are about 15.5.
Is that a fair price to pay? You may be surprised to hear this, but I'm actually a bit more cautious on this question than is UBS. In releasing its earnings last week, Qiwi cautioned that adjusted net profits could decline by a further 10% this year. That being said, most analysts who follow the stock are looking for profits to average 13% annualized growth over the next five years.
To my mind, that's a pretty decent growth rate to support an EV/FCF ratio of 15.5 on Qiwi stock. It's not as attractive as when I first highlighted Qiwi as a buy on my CAPS page. (Then again, that's not surprising, as shares have gone up nearly 40% in price in the months since I recommended it.) Still, Qiwi's in the ballpark for deserving a buy rating. While I cannot recommend buying it at today's price, I would encourage investors to keep a close eye on this fast-growing Russia stock, and stay alert for the next pullback in price.
Next time the price looks right, I'll be sure to point it out to you again.