News > Technology
What outsourcing backlash?
Shares of Cognizant, Wipro, Infosys and Satyam have soared as more companies move jobs to India.
February 9, 2004: 7:45 PM EST
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Concerns about jobs being shipped overseas have created a big political stir. But the companies that are benefiting the most from this trend don't seem to be affected by the controversy.

In fact, investors have been seduced by the explosive growth potential of companies that have outsourcing operations in India.

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Shares of Infosys (INFY: Research, Estimates), for example, have surged nearly 70 percent during the past six months...and that makes it the laggard.

Cognizant Technology Solutions (CTSH: Research, Estimates) is up more than 80 percent while Wipro (WIT: Research, Estimates) and Satyam Computer (SAY: Research, Estimates) have both more than doubled.

Cognizant has its headquarters in Teaneck, New Jersey while the other three are based in India and trade in the U.S. as American Depositary Receipts (ADRs).

These four companies have software programmers and other tech employees based in India that are performing work for American and multinational companies in a variety of industries. As more large companies seek ways to cut costs, the cheaper labor force in places like India is a prime selling point.

Political climate won't punish stocks

Still, this is a presidential election year in the United States. And since lackluster job growth is one aspect of the economy that remains a concern, political backlash could very well escalate. Could that put a dent in the stocks?

Ashish Thadhani, an analyst with Brean Murray, does not think so. "Fallout from the political debate has been minimal thus far," he said.

Offshore opportunities?
Shares have surged but these Indian outsourcers have strong fundamentals.
CompanyPrice Change (Past 6 months)P/E*Est. '04 Rev. GrowthLT Est. EPS Gr. Rate
Cognizant Technology Solutions81.9%45.741%29%
Satyam Computer130.3%29.331%19%
All data as of Feb. 6, 2004 * Based on calendar 2004 estimates

Pip Coburn, global technology strategist for UBS, agrees. He wrote in a recent report that the major Indian outsourcers are "respectful of the possible near-term downside in an election year".

As such, Coburn thinks that the companies are erring on the side of caution, with conservative estimates for increased spending by U.S. based companies this year.

With that in mind, the strong fundamentals for these four companies will probably continue to appeal to momentum oriented investors.

"The industry is today comfortable in its skin, knows its place is secured, no longer seems a need to pound the table to convince anyone of its importance," wrote Coburn. "India's position is obvious, and its growth seems almost certain."

Strong earnings, rich valuations

Cognizant will report its fourth quarter earnings Tuesday. Analysts are expecting earnings of 24 cents a share, an increase of 50 percent from the same period a year ago. Sales are predicted to come in at $105.9 million, a 58 percent jump from the fourth quarter of 2002 and an 8 percent increase from the third quarter.

Thadhani said the big reasons for the stocks' gains in the past six months are that pricing is improving and demand for outsourcing is increasing. He added that investors are pricing in sequential quarterly sales growth rates of about 7 percent for all four companies for the foreseeable future and that the companies should be able to deliver.

Job market
Technology stocks

Of course, since these stocks have done so well, they could be vulnerable for a pullback if they fail to live up to expectations. So if there is a negative on the near-term horizon, it isn't politics but good old-fashioned valuation.

"Offshoring stocks cannot be described as being cheap," said Thadhani.

The four stocks trade in a range of about 30 to 46 times earnings estimates for calendar 2004. But Thadhani thinks that as long as pricing for their services holds up, these multiples are justified since earnings estimates will probably continue to increase.

In addition, the long-term earnings growth rates range from nearly 20 percent to 30 percent.

So even though the state of the job market should continue to be a hot button issue between now and November, don't expect the debate to derail the shares of outsourcing companies any time soon.  Top of page

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