Infosys (INFY) shares have fallen 14% today. According to a Business Wire report, “Holzer & Holzer, LLC is investigating whether certain statements made by Infosys Limited (‘Infosys’ or the ‘Company’) complied with federal securities laws. On October 21, 2019, the Company announced that it received whistleblower complaints alleging ‘unethical practices’ by Infosys’ executives to boost short-term revenue and profit. The price of Infosys stock fell following the announcement.”
The accusations are severe. Allegedly, the company hasn’t adhered to revenue recognition, according to accounting standards. Public companies get slammed if they don’t follow ethical practices.
Investors and stakeholders expect a high level of transparency from listed companies. We have seen how Boeing shares have fallen more than 10% in the last two days after employee messages leaked to the public.
Infosys has gained 3.8% year-to-date
The pullback means that Infosys has risen 3.8% year-to-date. The stock has traded flat in the last 12 months. The stock is trading 25% below its 52-week high. The company has a forward PE ratio of 15x. Analysts expect Infosys to increase its sales 8.9% to $12.85 billion in fiscal 2020 and 8.3% to $13.92 billion in 2021.
The company will likely increase its earnings 5.9% in fiscal 2020 and 8% in fiscal 2021. Meanwhile, the company will likely increase its earnings by an annual rate of 8% in the next five years. Infosys increased its earnings 5% annually over the last five years.
Looking at the forward PE ratio and earnings growth, the stock looks overvalued by at least 40% even after accounting for its dividend yield of 2.2%. Analysts are bullish on the stock. They have a 12-month average target price of $11.6, which is 28% higher than the current trading price.
Will the whistleblower allegations result in analyst downgrades and lower target prices? Among the 15 analysts tracking the stock, two recommend a “buy,” 12 recommend a “hold,” and one recommends a “sell.”
The decline doesn’t make the stock attractive due to its high valuation. Any escalation in the whistleblower incident could decimate the stock and drag it lower.