Inside Wall Street: Genpact expands global reach
The business process management company has meanwhile managed to reduce its dependence on former parent GE.
Now that most of the large-cap stocks have piled up gigantic gains as the market continues to soar to record highs, many investors have started to scout for still undiscovered and underpriced stocks in the small-cap sector that show promising prospects for strong growth.
That means a rotation in buying interest is starting to take hold towards lesser-known stocks that so far have not fully participated in the current robust bull run. A sector rotation usually follows the first part of a major bull market which broadens the extent of the advance.
One notable small-cap stock that has started to attract increasing attention is Genpact (G), a global company engaged in managing business processes, particularly information technology and financial functions, for major companies worldwide. A positive attribute of Genpact is its history as a former division of General Electric (GE), where Genpact provided essential services in managing its various business processes that improved the giant conglomerate's widely varied operations.
GE eventually spun off Genpact, which went public in 2007. By 2012, GE still accounted for 26% of Genpact's total revenues, down from 58% before it became public. And by 2010, GE had reduced its ownership interest in Genpact to 18%, and has steadily cut it down since. Currently, it has slashed its stake to only 5%. In terms of revenues, GE accounted for 26% of Genpact’s 2012 total revenues, down from 58.5% in 2007.
You would think that with its close link with GE, Genpact would take advantage and strive to gain more business from its former parent. But not Genpact. It has been cutting back its dependence on GE, reducing the revenue flow from it to diversify its customer base and widen its markets worldwide. It's part of an effort to demonstrate Genpact's strength and independence as it improves its own operations.
"Genpact's GE process legacy should help drive execution and diversification of the client portfolio in this secular growth market, leading to reduced revenue exposure to GE," says Ed Caso, analyst at Wells Fargo Securities, who rates the stock as outperform. The better than expected quarterly results reflected strength across Genpact's business, with the financial services in particular growing nicely at 21%, he notes.
Part of Genpact's continued growth after weaning away from GE is the growing demand for its service from overseas. "The company is continuing to make strong gains, adding to its global client base, as it diversifies away from General Electric," says Dylan Cathers, analyst at S&P Capital IQ.
The analyst, who rates the stock a hold given the stocks sharp rise, notes that despite global economic weakness, Genpact posted revenue growth of 18.8% in 2012. "We think the company will benefit from further growth of global clients and we see particular benefits from the insurance, consumer goods, and retail verticals," says Cathers.
"S&P Capital IQ consensus figures point to revenue growth of 15% in 2013, which we trace to strong demand in both the Business Process Management and IT Outsourcing segments," says Cathers, who raised S&P's 12-month price target to $21 a share from $18.
The stock has climbed to a 52-week high of $19 as of May 22, 2013, way up from its IPO price of $14 in 2007. Other analysts have higher 12-month price targets for the stock.
Joseph D. Foresi of Janney Capital Markets sees the stock climbing to $23 a share, noting that the demand environment for business processing management remains healthy. "Investors will be attracted to the positive characteristics of BPO (business processing services) in the present choppy economic climate," he says, where "Genpact is performing well with future estimates backed by a healthy pipeline, including large deals and improving sales force productivity."
These trends, he adds, should combine to drive organic growth rates higher over time. "Genpact is off to a good start in 2013, reporting results above expectations and reaffirming guidance as the business appears on track," notes Foresi. He forecasts Genpact will post earnings of $1 a share in 2013 on revenues of $2.19 billion, and $1.14 a share in 2014 on sales of $2.49 billion, up from 2012's 96 cents a share on revenues of $1.9 billion.
Part of Genpact's strength stems from the steady rise in the number of its global customers, which increased 21% in the first quarter of 201 compared with the year-ago quarter.
Analyst Manish Hemrajani of Oppenheimer has reiterated his outperform rating on Genpact, following "solid first quarter results and management commentary and guidance," prompting him to raise his price target to $21 from $20. He also upped his earnings estimate to $1.03 a share on a revised projected revenue forecast of $2.18 billion. For 2014, he raised his estimates to $1.20 a share on projected revenues of $2.48 billion.
In sum, as a niche player in a hidden area of business processing operations, Genpact has become an undervalued stock in the still lagging small-cap sector, making it an attractive investment choice in the group.
Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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