Outsource your money. No, I'm not talking about giving your money to someone else to invest. I'm referring to investing in technology outsourcing companies. Here are three reasons these stocks might help you keep your money close to home.
1. Reports of outsourcing's death are premature.
A recent BDO survey of 100 U.S. technology chief financial officers found that just 32% of CFOs say they will outsource to companies outside the United States, compared with 62% in 2009. Is outsourcing really on the decline? I don't think so. If this survey was representative of the actual state of IT outsourcing, it stands to reason that major outsourcing vendors would be hurting. They aren't.
For example, global consulting and outsourcing firm Accenture (NYSE: ACN ) reported revenue growth of 12.3% and earnings growth of 28% in its February quarter compared with the prior year. Last quarter's revenues and earnings for Cognizant (Nasdaq: CTSH ) were up 24.8% and 17%, respectively. IBM (NYSE: IBM ) increased its 2011 revenues from outsourcing by 7.5% in its Global Technology Services segment and by 9.5% in its Global Business Services segment.
What about going forward? Cognizant says it's adopting "a conservative stance" by projecting a 20% revenue increase in 2012. IBM upped its estimated earnings per share from $14.85 to at least $15 for 2012.
CIO.com sees security and cloud computing as potential drivers for increased outsourcing demand. A KPMG survey found that customers are emphasizing opportunities such as analytics, cloud, and social media. The survey concluded that technology needs combined with eventual world economic improvement should serve as catalysts for outsourcing growth. If these outlooks are correct -- and I think they are -- investors can profit from this growth.
2. Cash is king ...
Another good reason for investors to look at outsourcing companies is cash. Outsourcing vendors tend to generate lots of it:
Cash Flow/ Share
(Including Short-Term Investments)
Trailing P/E Adjusted for Cash
|Infosys (Nasdaq: INFY )
|Wipro (NYSE: WIT )
Sources: Yahoo! Finance, Motley Fool CAPS.
The outliers in this comparison are IBM and Wipro. IBM's other business segments help it outpace the other companies. Wipro significantly lags the others in the cash metrics, in part because the company carries a high level of receivables on its books. Wipro management attributes the high receivables to inefficient collection processes that they're working to correct.
How the companies use the cash matters to investors. Accenture has the strongest dividend, with a forward yield of 2.4%. Infosys and IBM aren't far behind, with dividend yields of 1.9% and 1.8%, respectively. Wipro has a smaller yield of 0.9%, while Cognizant doesn't currently pay a dividend.
Share buybacks can also be good for investors, although not always. IBM leads the way on this front, with plans to repurchase around $50 billion of shares through 2015. Accenture bought back $750 million in shares in the first half of its 2012 fiscal year and has $5.5 billion authorized for future buybacks. Cognizant recently increased its repurchase program to $1 billion through 2013. Some analysts expect Infosys to announce a stock buyback soon.
3. … but the dollar isn't.
Despite showing some strength in May, the dollar is still relatively weak. So how does a weak dollar help outsourcing vendors?
First, companies that generate a significant portion of revenue outside the U.S. report higher revenue amounts when the dollar is cheaper against other currencies. Accenture, for example, received 65% of 2011 revenues from countries other than the United States.
Second, a Bankrate.com article on how a weak dollar affects Americans lists three steps: (1) Commodity prices go up when the dollar is weak; (2) corporations look for ways to maintain profitability with higher prices; (3) corporations outsource to hit their numbers.
Regardless of the party in power, King Dollar appears likely to remain in exile. President Obama and Federal Reserve Chairman Ben Bernanke have been criticized for their weak-dollar policy. Mitt Romney, likewise, has detractors about his lack of commitment to a stronger dollar. I wouldn't bet on seeing the dollar regain its throne.
Whom to hire?
The topic of outsourcing can generate heated opinions. I think some of the outsourcing stocks might generate their own heat, too.
In particular, Accenture and IBM look like good picks. Each has global operations and generates lots of cash. They both show solid revenue and earnings growth. While an overall economic downturn would negatively affect their bottom lines, these companies should do well over the long term.
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