Luxoft offers specialized software development to multinational companies in 6 main sectors: Financials, Automotive, Technology, Telecom, Travel and Energy. Around 65% of revenues come from the financials, mainly from contracts with Deutsche Bank and UBS. Most of workforce comes from Ukraine, Poland, Russia, Bulgaria (advanced projects) and Vietnam (less advanced). Customers are mostly from US, UK and Germany, with companies like Ford, Boeing, and IBM using their services.
According to Luxoft, wage costs for qualified programmers are 75% lower in CEE (Central and Eastern Europe), than in the West. Wage inflation is around 6% in Russia and Ukraine, but they still have a huge cost advantage for many years to come. LXFT basically offers higher quality work than developers from India or Bangladesh, for a fraction of the cost in US or EU. Let's look at financials:
According to Luxoft, wage costs for qualified programmers are 75% lower in CEE (Central and Eastern Europe), than in the West. Wage inflation is around 6% in Russia and Ukraine, but they still have a huge cost advantage for many years to come. LXFT basically offers higher quality work than developers from India or Bangladesh, for a fraction of the cost in US or EU. Let's look at financials:
Luxoft has grown steadily over the past few years, gross and operating margins are recovering after a dip from 2011. Net margin was down in 2015 due to a $8 million loss on currencies (which is strange, considering their revenues are in EU and USD, while costs in currencies like Polish Zloty and Russian Ruble) and a higher tax rate. They have a special tax treatment in Russia (until 2017) and recently moved to Switzerland so tax rate shouldn't increase in the near future.
Valuation
I used a three stage DCF model with these assumptions:
- profit growth of 20% for next 5 years, 10% for years 6-10, 2% thereafter
- discount rates of 6,7,8%
- 13% net profit margin
- profit growth of 20% for next 5 years, 10% for years 6-10, 2% thereafter
- discount rates of 6,7,8%
- 13% net profit margin
You can see that LXFT offers at least 30% potential from current prices, given assumptions above. I think it is trading so cheap because of the situation in Ukraine and Western sanctions against Russia. Another thing is that the company derives most of it's revenues from financial sector, which is currently not "popular", but much better capitalized and with a brighter future than in 2007. Be greedy when others are fearful, and be fearful when others are greedy. I am going long LXFT stock today with a stop loss like usual.
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