3 IT Stocks to Buy in 2013
Madhu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
2012 was a tough year for IT stocks with major cutbacks in IT spending. For this year, things seem to be settling down, with market optimism surrounding this industry as well as increased IT spending. Gartner recently revised the expected growth rate in IT spending from 3.8% to 4.2% for the year 2013. I see this increase as an opportunity to invest in IT stocks, which should see upside in the second half of 2013. Scouring the investment landscape, I have discussed three stocks from the industry that should be benefit the most.
Cognizant Technology Solutions (NASDAQ: CTSH)
Because of tough macro conditions in the Europe, the increasing adoption of outsourcing to save costs has been a positive sign for most of the large-scale service providers in the region. Cognizant's European region that contributes about 16% to the total revenue grew by 9% - an acceleration from the third quarter as the company continues to gain momentum in the region. The growth appears sustainable and I remain upbeat about its long-term prospects in Europe. Moreover, the recent acquisition of six companies from the C1 Group, Germany, should contribute about $90 million to the region’s revenue base. These companies deal in financial services, manufacturing, and energy. The acquisition shows the company's commitment towards Germany and the rest of Europe.
Another factor, on which I place my confidence, is Cognizant's Horizon initiatives in 2013. Horizon-2, which includes business process outsourcing, IT infrastructure services and business consulting, accounts for around 20% of its total revenue and its growth in sales is twice the average rate of the company. Horizon-3 initiatives, such as social, mobile, analytics, and cloud technologies have now reached around 60% of its top 100 customers and this exposure should further grow in 2013. The company's top 16 clients contribute about one-third of its total revenue and these initiatives will further accelerate Cognizant's presence in them. The company is one of the handfuls of providers that can aggressively compete for these projects. I see both the Horizon initiatives booming in 2013.
Past performance of the company, along with the growing rather than stabilizing European region; and its initiatives like Horizon makes me bullish on this stock.
Accenture (NYSE: ACN)
Accenture's existing customer base includes about 75% of the global 500 companies, and this includes 92 of the top 100. The company refers to any customer, who spends more than $100 million annually, as Diamond Clients. And, in the last three years, the number of such customers has increased by one-third of the total. Accenture benefits a lot because of its strong reputation and brand name and this helps it in avoiding competition in a majority of its projects.
It has also increased its attention towards the emerging markets. The company's priority emerging markets include the Association of Southeast Asian Nations (ASEAN), India, China, etc. Currently, in the ASEAN region, it is serving 19 out of the 37 global 2000 companies. Opportunities in the region are many, with about 8.8% of the world’s population located in the seven countries of ASEAN. To capture this, Accenture acquired NewsPage Pte Ltd. It is a Singapore based IT company that develops mobile applications available in about 20 different countries. This acquisition aids its existing Consumer Goods and Service platform, making it compatible with different operating software.
In addition to this, Accenture is quite a shareholder friendly stock. The company keeps about 75% of its operating cash flow for share repurchase and dividend payout. Since its listing, the company has reduced weighted average diluted shares by 28%. In 2013, it expects to return $3.3 billion through share repurchases and dividends to shareholders.
Its existing customer base, inclination towards the emerging markets and capital allocation plans should support the growth of the company in the future.
Virtusa (NASDAQ: VRTU)
The company reported its third-quarter 2013 results that were in-line with the expectations of the street. For the quarter, it had a revenue of $86.5 million (up by about 20% year-over-year) against the consensus estimate of $85.5 million. The company acquired three new clients in the quarter, thereby meeting its goal of adding three to five new clients every quarter. The growth in revenue was mainly because of the expansion in its top three clients.
The top three customers of the company; JPMorgan Chase, British Telecom, and a large insurance company, which contribute more than 10% of the company's revenue. In the last-quarter, business with JPMorgan was up by 7% sequentially, evidence that Virtusa is growing its relationship with the company and this should drive additional opportunities to expand its wallet share over the next two to three quarters. Virtusa helped in rationalization of JPMorgan's online banking and mobile services.
In the last quarter, strong momentum from the European region was driven by Virtusa's dealings with British Telecom. Despite the IT budget cuts at British Telecom, the company was able to expand its penetration. It continues to gain good wallet share, and should grow sequentially in the fourth quarter as well. Virtusa’s relationship with British Telecom has given it a preferred vendor status. According to which, it maintains the terms of the previous master service agreement they had, but allows it to compete for larger deals.
The company's top 10 clients contribute around 62% to its revenue; and a strong relationship with them provides clarity and stability to Virtusa's future.
With economic conditions settling and expected increment in IT spending; I feel that the IT industry has a lot of potential to grow. Here's a quick look at how the above three stocks can materialize the growth:
Cognizant's growing European region and Horizon initiatives coupled with the past performance make me bullish about the stock.
Capital allocation plans make Accenture a lucrative stock, and a strong customer base and increasing inclination towards the emerging markets should aid its performance.
Virtusa is relatively smaller in comparison to Cognizant and Accenture, but nevertheless the increasing penetration of the company in its top clients strengthens my faith in the company.
Madhu Dube has no position in any stocks mentioned. The Motley Fool recommends Accenture. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!