Genpact - A Buy on Weakness
Genpact Limited (NYSE:G) is an IT and professional services company doing business globally but with a large presence in India. Genpact clients are industry verticals and operate in banking and financial services, insurance, capital markets, consumer product goods, life sciences, infrastructure, manufacturing and services, healthcare, and high-tech. Genpact's services include aftermarket, direct procurement, risk and compliance, human resources, IT, industrial solutions, collections, finance and accounting, and media services. Genpact was spun out of General Electric in 2007. A majority of Genpact's employees are based in India and services are performed from India due to lower labor costs, but most of its clients are based in North America (70%) and Europe (15%). Outsourced professional services are a sticky business because once an organization has outsourced core business processes to an outsourcer like Genpact, changing providers becomes very difficult and if the services provided are satisfactory, organization tend to stay with the contractor over the long term as they get to know each other's business and people very well. Thus the business has a narrow moat.
Genpact caught my eye when I was looking for companies caught up in the recent stock market weakness, but which have strong balance sheets and are good candidates to bounce back in the coming year. Genpact seems to fit the bill. Genpact has a strong balance sheet with low Debt to EBITDA (x2.26), and free strong cash flow as well as a perfect predictabiliy rank. Looking at the GF Value chart below I see that the stock is about 30% below the intrinsic value calculated by Gurufocus.
Looking at the GF Score chart, I note the very strong Profitability and Growth ranks. Financial strength rank is acceptable and the only thing weak is Momentum.
GF Valuation | Modestly Undervalued | |
GF Score | 94 | of 100 |
Predictability Rank | 5 | of 5 |
Growth Rank | 10 | of 10 |
Financial Strength | 6 | of 10 |
Valuation Rank | 9 | of 10 |
Quality Rank | 10 | of 10 |
Momentum Rank | 4 | of 10 |
Profitability Rank | 10 | of 10 |
I also compared Genpact's stock price with its historical 10-year median justified, Price to Earnings (PE), price to Sales (PS), Price to Book (PB) and Price to Operating Cash Flow. I note that these median justified values are much above the current stock price which is indicative to solid value. Obviously the assumption being the stock price will eventually move closer to its historical median fundamental value.
G Data by GuruFocus
Conclusion
During the month of October I look for stocks which have strong financial strength but are trading near their 52-week lows and may be subject to selling due to tax loss harvesting. My strategy is to buy some of these stocks in the October to mid-December time period and then sell them in January, thus taking advantage of this seasonal pattern. Genpact fits this criteria for a short term flip though its also a very high quality, asset light business with a high Return on Equity and is likely a candidate for a long term hold. The risk to my thesis in that the US economy tips into a recession, which may extend the weakness and will delay a bounce back.
This article first appeared on GuruFocus.
