According to a recent Morningstar report, the IT services and consulting industry is poised to enjoy a pickup in client demand. Yet with shares of major players such as Infosys (NYSE:INFY) and Wipro (NYSE:WIT) having already priced in a recovery, investors need to tread carefully.
Starting with the big picture, Morningstar highlights two key tech-spending indicators. The first gauge, the Tech Pulse Index, consolidates U.S. technology investment, consumption, employment, and production into a single metric. Morningstar notes that the index has steadily trended upward since bottoming in May of last year. Indeed, the index posted annualized growth of 14.2% in December 2009 -- shy of the roughly 21% average, but a huge gain on the trailing-12-month levels.
The second encouraging sign comes from a recent survey conducted by research firm Economist Intelligence Unit. In short, more than half of surveyed global industry execs now expect firmer tech demand in the next six months, versus a small minority of optimists earlier on.
That upbeat outlook is turning up in company results. Infosys just reported an improved quarterly showing, while quarterly revenue at Indian competitor Tata Consultancy (NYSE:TCS.NS) ticked 5% higher, atop a 33% leap in quarterly profit.
However, it may tough for investors to make money in 2010 with either of these names. Check out the table below, which compares the largest Indian IT companies with two of their global competitors.
|
Company |
Market Cap |
TTM Revenue Growth ** |
Est. 2010 EPS Growth *** |
Forward P/E |
|---|---|---|---|---|
|
Tata Consultancy |
$33.8 billion* |
15.1% |
N/A |
N/A |
|
Infosys |
$33.5 billion* |
(0.6%) |
11.3% |
23.0 |
|
Wipro |
$32.3 billion |
11.8% |
12.7% |
21.9 |
|
IBM (NYSE:IBM) |
$172.4 billion |
(9.4%) |
10.1% |
12.2 |
|
Accenture (NYSE:ACN) |
$27.1 billion |
(12.6%) |
11.4% |
14.4 |
Data from Yahoo! Finance and CapitalIQ, a division of Standard & Poor's, on Jan. 15.
* According to CapitalIQ.
** TTM revenue growth for Tata Consultancy and Infosys does not include recently reported quarters.
*** Infosys' and Wipro's forward EPS estimates are for fiscal 2011, which ends March 31, 2011. Accenture's forward estimate is for fiscal 2011, which ends Aug. 31, 2011.
Business for the India-based group clearly held up better during the recession. Morningstar attributes that success to its generally higher exposure to nondiscretionary services, such as application maintenance and business process outsourcing. (The latter involves the offshoring of routine back-office tasks -- think payroll and call centers.)
However, valuation for these companies far exceeds expected near-term growth, making global heavies Accenture and IBM more attractive for the time being. Although far from a pure IT and consulting play, one might add Hewlett-Packard (NYSE:HPQ) to that list of potentially better buys.
But for investors who like the long-term growth potential of the Indian names, Wipro might be the most interesting of the bunch. I recently argued that the company's services mix hits the industry sweet spot. In addition, Morningstar suggests that Wipro may have first-mover advantage in emerging opportunities such as infrastructure management -- a business that could see better than 30% compound annual growth over the next several years.
In summary, while 2010 is certainly off to an encouraging start for the industry, I'd wade into shares cautiously. It doesn't take a consulting team to figure out that buying high is no path to profits.
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