Get to Know Cognizant, Accenture
Why does all this matter? For decades, big organizations have decided that their computer systems are important but they simply can't afford to put top programmers on their staff. As a result, they hire outside companies to build systems to solve problems like keeping track of inventory or selling their products online.
This industry is big and growing. According to Canadian researcher, XMG Global, the global outsourcing industry is forecast to end 2011 at $464 billion -- 9.2% larger than in 2010 -- it grew 13.9% last year. And the reason it's growing is simple -- companies need new computer systems, they have the budgets to build them but can't get the job done quickly and cheaply with their in-house staff.
But XMG believes that growth in the industry goes up in proportion to global economic growth. And now a feared slow down in global expansion is scaring some of the biggest outsources. For example, The top 20 IT companies in India account for over 60% of engineering job offers to students there, according to the Times of India.
And those big employers have made plenty of offers. So far in 2011, Indian outsourcers TCS hired 40,000 students, Infosys 30,000, Cognizant 28,000, Wipro 20,000 and HCL 8,000. They hired that many people based on two factors -- the number of big deals in their sales pipeline and the rate at which they expect programmers to quit or get fired.
But the attrition rate is falling as the number of job opportunities for experienced programmers dries up and the size of new deals is also declining. For example, in the last couple of quarters, the attrition rate has dropped from 25% to 15% and companies are no longer able to close deals bigger than $100 million.
As a result, students who received job offers do not yet know when they will start work. In India, students who are about to graduate regularly receive general offer letters that do not specify when they should report to work.
They later receive so-called appointment letters that tell them when to start. The Times of India reports that there are many who graduated in June but are nervously awaiting a letter -- perhaps in October or November -- that will tell them when they should start.
These delayed start dates are like the canary in the coal mine for the earnings prospects for the industry. But do they mean that you should avoid all of the stocks in the industry? Consider Cognizant and Accenture -- steer clear of CSC. Here's why:
- Cognizant: booming, profitable, fairly priced stock. Cognizant revenues soared 40% to $5.3 billion in the last year and its net income of $826 billion was up 37.1% -- yielding a fat 15.6% profit margin. Although it has a slim profit margin, the stock is fairly priced -- based on a Price-earnings-to-Growth ratio of 1.13. Cognizant's P/E is 24.5 on earnings forecast to grow at 21.7% to $3.40 in fiscal 2012. Cognizant's second quarter earnings rose 20.8% from the year earlier quarter while revenue was up 34.4% to $1.49 billion.
- Accenture: profitable, growing, moderately expensive stock. Walgreen revenues are up 18.4% in the last year to $27.4 billion during which it posted a $2.3 billion profit, up 27.9%. The stock is fairly expensive -- based on a Price-earnings-to-Growth ratio of 1.47 (1.0 is fair value). Accenture's P/E is 16 on earnings forecast to grow at 10.9% to $4.25 in fiscal 2013. In its fiscal fourth quarter -- reported Wednesday -- Accenture reported a 37% jump in earnings and a 23% revenue rise. If Accenture can continue this growth pace, its valuation looks low.
- CSC: barely profitable, fairly priced stock. CSC revenues barely budged, up 0.8% to $16.2 billion in the last year and its net income was $750 million was down 13.2% and it has a slim 5% profit margin. The stock is fairly priced -- based on a Price-earnings-to-Growth ratio of 0.95. CSC's P/E is 5.8 on earnings forecast to grow at 6.1% to $4.66 in fiscal 2013.