Outsourcing, IT, Infosy
Investing in Outsourcing
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Outsourcing carries with it a lot of baggage in today's politically charged environment. Regardless of one's opinion on this global phenomenon, there's no denying it has become a major economic force; Infosys Technologies writes as much in its latest financial statement: "Offshoring has become a megatrend."
As in any economic endeavor, there will be companies profiting from the enterprise. Based in India, like its competitor Wipro, Infosys is one of many companies in this industry seeking to help corporations keep costs in check, while maintaining a high level of quality in their businesses.Its customers are some of the largest and most well-known companies in the insurance and financial sector (Infosys' highest revenue stream comes from this market), the telecom industry (its second-highest revenue stream), and manufacturing (its third-highest source of revenue); discount retailers are also major customers. A few corporations taking advantage of this trend include IBM, Electronic Data Systems, and, most recently, Microsoft. Infosys alone added 32 new clients in its most recent quarter; 70% of its customers are based in the U.S. and outsource operations to locations in other countries.
Infosys was a $20 stock last year, but it now trades in the $70 range. Have investors missed the party? For 2005, the company is expecting earnings growth of 42%, and it projects sales growth of 46% to 47%. Its price-to-earnings ratio of 34 is reasonable, given the estimated growth rate.
Looking closer, it has produced $279 million of trailing-12-month (TTM) structural free cash flow (SFCF). With $335 million in cash and no long-term debt, Infosys carries an enterprise value of $18.2 billion, or 65 times its TTM SFCF. From a cash flow analysis perspective, Infosys is selling at a premium. But consider its net profit margins of 25% and returns on equity and investments above 40%, and it's obvious the company is operating with premium performance.
Outsourcing is a major trend, and in many respects it appears to be in its infancy. If the market provides an opportunity to buy Infosys on weakness sometime over the course of 2005, you may have a serious market-beating investment on your hands.
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