Genpact Sees Surge In Outsourcing Business; BPO Stocks Up
Highly rated but modestly traded Genpact ( G ) stock bumped up a fraction Friday, after a day of show-and-tell at its analyst day Thursday that spotlighted a surge of growth for the outsourcing business. Many rival stocks were up even more, with Paychex ( PAYX ) stock up 2% in midday trading in the stock market today . William Blair analyst Anil Doradla came away “with the sense that business fundamentals were intact and that the company’s deal pipeline is healthy,” he wrote in a research note Friday. Genpact executives suggested that the company had plenty of room for growth in its business process outsourcing market, because revenue for the market overall rose 35%, to $500 billion, in the past year, while Genpact sales rose 8%, to $2.46 billion, Doradla said. But he also said BPO growth will slow. Doradla put Genpact trading at 18.8 times William Blair’s 2016 EPS estimate for Genpact, “a slight premium to its peers in the fast-growth BPO industry,” which is trading at 17.6 times estimated earnings, he said. BPO is found in more than one industry group. In IBD’s Commercial Services-Outsourcing group, Genpact ranks as the fourth-largest company, with a market cap of $5.6 billion. The group is led by Paychex with an $18.9 billion market value, Cintas ( CTAS ) at $9.5 billion and Aramark ( ARMK ) at $7.7 billion. Shares of both Cintas and Aramark were up more than 1% midday Friday. IBD’s Computer-Tech Services also hosts some heavyweight outsourcers, including Infosys ( INFY ) with a $40.3 billion market cap, and Cognizant Technology Solutions ( CTSH ) at $33.9 billion. IBM ( IBM ) is included in this group, although it does much more than outsourcing. Infosys stock was up a fraction midday Friday, while Cognizant was more than 2% and IBM nearly 2%. Genpact specializes in financial services outsourcing, contributing about 42% of its revenue. Manufacturing and health care are its other two main markets. Sales to its largest customer, General Electric ( GE ), fell 1% last year to 19% of Genpact’s total revenue. Genpact is a GE spinoff. “Overall, we came away with a bullish tone from management, both at a company-specific level and with regard to the overall BPO market,” Doradla said. “Management highlighted that the company is witnessing healthy demand in its business and that Genpact has an active deal pipeline. “Some of the key drivers for the upwardly revised figures include customers increasingly viewing BPO companies as transformation partners who not only offer a cost arbitrage, but also provide valuable insights into business operations. Specific areas in which the industry is increasingly engaging clients include IoT, big data and cybersecurity. “Bottom line, we believe that the BPO industry is poised for strong overall growth over the next several years and that Genpact stands to grow at a faster pace than the overall industry due to domain expertise and strong client relationships.” Genpact carries an IBD Composite Rating of 96, with 99 the highest, and currently is an IBD Leaderboard stock. Trading near 26.50 midday Friday, it is within range from a 26 buy point touched last month.