Ugly Duckling Call Center Stocks Remain Relevant

Convergys leads the way with a market that refuses to live down to expectations and negative public opinions

Feb 13, 2014 at 10:05AM

Nobody likes call centers, except those making money from them. As it turns out, there are plenty of these folks around, because as much as call centers are dragged to the public whipping post, they continue to outperform in an increasingly brutal market.

Call center companies are the ugly ducklings of a stock portfolio. They aren't sexy. You don't brag about them at happy hour. But they remain relevant investments because of how they do necessary marketing for a low price. They're the obnoxious cousin of your portfolio.

Two significant trends suggest profits from call center stocks are not going away any time soon. These are 1) technological advancements and 2) low labor costs here and abroad.

The leaders
Convergys Corp (NYSE:CVG) is an industry leader that provides outsourced integrated billing and customer care services. The company stock dropped 3% after the Feb. 5 release of its annual and fourth quarter earnings. But the long-term forecast remains strong.  In early February, Zack's rated it to outperform expectations in the coming year. Its one-year forward P/E is 18.1, topping the industry average of 17.3.

Other top American based call center companies include, TeleTech Holdings (NASDAQ:TTEC), a global provider of business process outsourcing solutions, which has a current market cap of $976 million; and Sykes Enterprises (NASDAQ:SYKE), which provides outsourced customer contact solutions and has a current market cap of $776 million. Convergys leads the way with a market cap of $1.6 billion and remains the bellwether stock in this group.

Technological advancements
Yes, call centers remain those vexing people with strange accents who act like your best friend on the other end of the phone right as you get comfortable after a long day's work. As technology advances it's easy to think these people would get a clue and stop calling.

Well they are and they aren't and both are profitable.

For starters, the core revenue stream of cold call marketing still has its distasteful, yet profitable place. But increasingly these companies are expanding beyond it, tapping into our need for immediate, personalized service. This is the future of call centers.

Technology is making those voices on the other end of the phone more sophisticated by essentially replacing humans with computers. Artificial Intelligence is now being applied to self-service. As technological advances increase, our expectations for self-service increase as well. Call center companies provide essential business-to-business services to meet those expectations.

Technology now allows for virtual self-service for a wide-array of companies. Virtual chats and online help are growing, two things a majority of customers say they want in customer service.

One example, the banking industry, now relies on these services, which is a long way from the brick and mortar, nine-to-five banking experience.

"Call center technology has already evolved in a way that makes the call center operate much more like the other banking channels. Newer solutions integrate with banks' existing CRM platforms to present a more complete view of the customer relationship," a banking technology and services blogger wrote.

The companies who know this best are those providing the services and looking for the latest in technological advancements, companies like Convergys. According to a report on its company website, "The number of consumers preferring automated self-service has doubled to 55% in the last five years."

Low labor costs
An industry whose survival lies in labor that costs five times less than most companies will continue to focus on the bottom line. Global call centers are growing even as the government looks to "repatriate" jobs back onshore. Besides the bastions of growth in the Philippines and India, new call centers are springing up in places like Eastern Europe and China where English language skills provide a strong labor force.

Even at home, those jobs aren't so expensive after all. Unicor, the brand name that cloaks Federal Prison Industries, makes about $10 million a year in profits from supplying a labor force that costs less than $1 an hour in most instances. While this would seem like a perfect example of the "unfair labor advantages" that both the United States Chamber of Commerce and The AFL-CIO have complained to Congress about, it may not be the threat some think. Ten million is not a significant part of a multi-billion dollar market share.

Unicor services as many as a dozen different companies through its call center services. According to MSNBC, the government will not disclose those actual companies to assess the impact of competition. But we do know that prison labor force is highly limited in its access to technology and unable to compete in sectors that rely on 24-hour interactive customer service.

Call center companies have found other innovative ways to compete, including the growing work-from-home trend. According to one study, an estimated 60% of contact centers utilize home-based contractors. This labor force is much, much cheaper than hired employees.

Ugly is Foolishly beautiful
All of these companies are far less sexy than traditional tech stocks, but far more stable than many. Sexy? Profits are sexy, not flashy products. And for foolish investors looking for a long-term, downright ugly position that could well prove highly profitable, call center companies are worth a second look.

Andrew Bolsinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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