CTSH -- Ride the Outsourcing wave
This is continuation of the series in which I introduce some of my favorite names in technology. The major themes were discussed in the It's a tough market- pick your stocks wisely. In the first part we discussed JNPR and FFIV. Another theme that I like is Outsourcing, Lou Dobbs can say what he wants but it's happening and we all benefit from it. Competition in outsourcing is good for all including
Some of the companies that are leaders in outsourcing are: INFY, WIT,SAY, CTSH. According to
CTSH is based in U.S unlike many of its competitors was spun out of Dun & Bradstreet. Like its competitors, CTSH has majority (73%) of its employees outside of
Some important material from CTSH 10K just filed:
- Core competencies include web-centric applications, data warehousing, component-based development and legacy and client-server systems.
- Have proprietary methodologies for integrating on-site and offshore teams to facilitate cost-effective, on-time delivery of high-quality projects. These methodologies comprise our proprietary Q*VIEW software engineering process, which is available to all on-site and offshore programmers.
- We have over 1,000 project managers and senior technical personnel around the world, many of whom have significant work experience in the
and United States Europe.
- Over 90% of our revenues in the year ended
December 31, 2004, were derived from customers who had been using our services for one year or more.
- Our senior project managers are hired from leading consulting firms in the
and United States . Our senior management and most of our project managers have experience working in the India and United States Europe
And then there are risks, including intensive competition. I believe risks are even more important when dealing with something so political like outsourcing.
- Our most direct competitors include, among others, Infosys Technologies (INFY), Tata Consultancy Services and WIPRO (WIT), which utilize an integrated on-site/offshore business model comparable to that used by us. I would include SAY in this list also.
- We also compete with large IT service providers with greater resources, such as Accenture (ACN), Electronic Data Systems (EDS) and IBM Global Services (IBM)
- A substantial portion of our assets and operations are located in
and we are subject to regulatory, economic and political uncertainties in India . India
- While wage costs are lower in
than in the India and other developed countries for comparably skilled professionals, wages in United States are increasing at a faster rate than in the India , which could result in our incurring increased costs for technical professionals and reduced operating margins. United States
- There is intense competition in
for skilled technical professionals and we expect that competition to increase. India
- The issue of outsourcing of services abroad by American companies is a topic of political discussion in the
. Measures aimed at limiting or restricting outsourcing by United States companies are under discussion in Congress and in as many as one-half of the state legislatures. U.S.
- A significant portion of our projects are on a fixed-price basis, subjecting us to the risks associated with cost over-runs and operating cost inflation.
CTSH has a hefty valuation (32X '06 EPS; but below PEG of 1) to go with its break-neck growth rate. I believe in paying up for quality and growth. Management has guided to 44% revenue growth for 2005 and I (and the market) would be disappointed if CTSH did not beat that guidance. Plus with stock trading close to 52-week high is evident of strong investor interest in CTSH. Its always nice to row with the flow.
Full Disclosure: At time of publishing the author owned shares of CTSH, which could change at any time without public notice.