67 WALL STREET, New York - January 25, 2012 - The Wall Street Transcript has just published its Staffing & Outsourcing Services Report offering a timely review of the sector to serious investors and industry executives. This Staffing & Outsourcing Services Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Workforce Flexibility Requirements - Stalwarts Look to Acquire Small Caps - Rich Industry Leaders to Acquire Small Cap Competitors - BPO & IT Outsourcing Reduce Labor Costs
Companies include: Accenture (ACN); Adecco (ADEN.VX); Alliance Data Systems (ADS); CGI Group (GIB) and many more.
In the following brief excerpt from the Staffing & Outsourcing Services Report , interviewees discuss the outlook for the sector and for investors.
Joseph D. Foresi is the Director of IT outsourcing, business process outsourcing and consulting at Janney Montgomery Scott LLC. He joined Janney in August 2004 and is a global services Analyst with a focus on outsourcing and consulting services. In this role, he focuses on providing comprehensive, in-depth, value-added information and makes frequent trips overseas where his covered companies operate. Before joining Janney, Mr. Foresi worked in private client portfolio management at Brown Brothers Harriman in Boston. He holds an MBA from Northeastern University and a B.A. in economics from the University of Massachusetts.
TWST: Among the companies you have mentioned, do any stand out?
Mr. Foresi: Our bias had been toward some of those stalwarts, given that the economy has been shaky - an IBM or an Accenture pays you a dividend, buys back stock, great cash flow, good consulting practices. And we're starting to get more constructive on names that have higher betas if the economy should do better than expected, so you're dealing with a Cognizant in that regard. And then, we still are pretty confident in the growth trajectory of our core outsourcing/BPO companies like a Genpact or an Exl.
TWST: Genpact is one company that bought a couple of others - High Performance Partners, LLC, and Headstrong Corporation - and they are in the process of buying EmPower Research, LLC. There have been other examples of acquisitions as well, such as by Navigant and ADP. What are your thoughts on the M&A activity that has taken place this year, and do you expect similar activity in 2012?
Mr. Foresi: The cash flow statements and the balance sheets for these companies are usually very good, because they are - by definition - services companies. And I do expect them to continue to deploy capital to buy acquisitions on the services side and on the consulting side. What you are going to see is acquisitions for capability, probably first, and then for good strategic fit, probably second. So clearly, if you look at the balance sheet and you look at the economy that we're headed for, I expect that capital will be deployed on the acquisition side. I don't think there will be any question about that.
TWST: Genpact also has a relatively new CEO, as does ADP, and Accenture went through some senior leadership changes. Were these changes surprising or significant, or were they cases of routine succession planning?
Mr. Foresi: Anytime there's a change in management, there's going to be a change in the way that a company is run. But at least in the cases that you've mentioned, the new person taking over was part of the organization prior to the transition. And I think that's a good sign from a consistency standpoint, in the direction of the company and the way that customers and employees are treated. I guess I'm not surprised, because of the age of some of the people at the companies that you discussed, that there was a transition. And the good news is that, to some extent, the general business plan will be retained, because the person taking over is well versed in what the general company direction is.
TWST: Among the companies you cover, have any of them made any significant changes to their business plan or strategic focus?
Mr. Foresi: I don't think so. In the case of higher-quality companies, it's more of adjusting the company and those plans to what the economy is telling you versus doing away with them all together.
TWST: Are there any geographic regions or service areas specifically being targeted for growth?
Mr. Foresi: Yes. In fact, IBM has a consistent message of investing heavily in emerging markets, and those markets, of course, have higher GDPs than what we see domestically. And so I think that's certainly one area that you see a lot of activity, and I think you'll see more and more going forward, as companies focus on more than just the requisite consumer-based mature markets. I think emerging markets is clearly a focus.
TWST: Genpact is another company that seems to be growing its overseas presence.
Mr. Foresi: Yes. I think if you get into the markets early, what you'll benefit from is - in the major markets, you've got maybe more mature procurement processes, pricing is more mature, so that is permeating the environment - in the emerging markets you have larger contracts, maybe some margin leverage, so I think that's a different sell. And I think that also establishing a presence in those areas is going to be very helpful as well.
TWST: You mentioned earlier some of the companies that you like. Are there any that you're particularly cautious about right now, and if so, why?
Mr. Foresi: I think the same things that make you positive about certain stocks make you cautious about other ones. If you look globally, unemployment is still challenging, which doesn't necessarily mean that business is bad for payroll providers, but certainly low unemployment rates would help. And then, given the austerity measures, that's certainly tough for companies that have exposure to the government, which would include one particular company that I cover, CSC (CSC). I think not everything is perfect in the world, and those demand trends could be better, but that might be a positive going forward over the long run. Over the short term, there are certainly some headwinds.
TWST: What were the highlights or themes that stick out in your mind from the most recent earnings reports? And what will you be paying most attention to in the next round?
Mr. Foresi: It's interesting. I think what we saw last quarter was that the market was selling off and the companies were telling you that things were good. What I think we're going to see coming up is that the market will be up and companies will tell you that they're cautious about their business, as they should be if they want to remain conservative in investors' mind. I think that those are the two juxtapositions of what we've seen and what we're going to see. The question is: How does the market react when people are being cautiously optimistic or conservative?
TWST: What are you expecting for 2012?
Mr. Foresi: I don't think it is any surprise to anyone; I think everyone's trying to figure out what's going to happen in Europe. It seems like that outlook is a difficult one until they - and it seems like the Europeans are resigned to taking - we don't know the time frame that it's going to take to clear that up. Here in the U.S., things seem a little bit more positive. So I think in that scenario you get muted growth domestically and Europe potentially headed to some negative quarters. I'm not ready to call it a recession, but negative quarters out of Europe. And that combined would mean that companies that are skewed toward the U.S. probably perform OK, and those depending on where they are in the European market and the U.S. market always could face more challenges.
TWST: What advice would you offer right now to investors who may be looking at this space?
Mr. Foresi: I would take core positions in some of the stalwarts or bellwethers, like an IBM or an Accenture, and I would be very patient with allocating capital. I believe that the market will probably give you opportunities, especially with all the uncertainty in Europe. And then depending on how your outlook for 2012 is, at specific multiples, you probably want to add some higher-beta stocks as we go through the year, because as things start to repair themselves in Europe, the derivative call would be that things get better here. Personally, I think that we've been advocating this year a conservative approach given what's going on in the economy. We would continue that with the caveat that it's probably time to maybe think about getting a little bit more aggressive. But there is no urgency to go out, in my mind, and dive into any particular stock, especially since the market itself could provide you opportunities at any point in time.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Staffing & Outsourcing Services Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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