Companies in the information technology services industry have seen some tough times lately.
The combination of a weak dollar and reduced corporate tech spending (due to the economic recession) resulted in a decline of 5.6% in 2009 (the industry’s worst ever year) and a paltry growth figure of 3.3% in 2010.
Well-diversified large-cap companies such as IBM (NASDAQ:IBM) and Hewlett-Packard (NYSE:HPQ) escaped relatively unscathed. However, companies such as Wipro (NASDAQ:WIT) felt the pinch as their stocks dropped from a high of $18.41 in January 2007 to $5.11 in March 2009.
Things may change this year, however.
Gartner forecasts that worldwide IT spending will total $3.6 trillion in 2011, a 5.6% increase from last year. Typically, this rise should translate into increased business for IT services companies as more work is outsourced. In addition, new financial regulations such as the Dodd-Frank law should increase demand for software and IT consultants as investment firms scramble to comply with new reporting requirements.
But keep in mind: Gartner’s figures comprise corporate expenditure on enterprise software, hardware — and consumer technology such as tablets. In fact, corporate spending on tablets is expected to increase by an annual compound growth rate of 52% by 2015. In comparison, IT services spending will only grow 5%.
Similarly, according to the TPI, a Connecticut-based data and information advisory firm, the total commercial value of outsourcing contracts during the first quarter of 2011 was $17.5 billion, a decline of 25 percent as compared to the last quarter and 28 percent during the same period last year.
Still, the tech services industry is a high-margin business with a well-established presence across all seftors
Here are three IT services companies that could be good buys for investors:
Wipro: This Bangalore-based outsourcing firm recently underwent a management change. After bottoming out through most of 2009, its stock price has clawed back up to a respectable $14 – $15 range. With a well-diversified client base across geographies (Europe accounted for double-digit growth for the second successive time this quarter) and projected increased demand, the company is poised to reap the rewards of an uptick in the world economy.
Computer Sciences (NYSE:CSC) One of the largest and oldest players in the IT services industry, CSC was in the news last year after it failed to install its first patient administration system for the National Health Service in the U.K. The contract was worth $1.3 billion. However, the news barely caused a ripple in the company’s stock price.
Given the breadth of its business, which includes a high-margin consulting business and a deep knowledge and experience of customer systems (which increases switching costs for existing customers), increased demand should be good news for this company.
Cognizant Tech (NASDAQ:CTSH): Although it is a relatively young company, Cognizant has been among the fastest-growing services firms. Its stock price has zoomed to $81.95, an increase of about 173% since 2007. Incidentally, the stock was trading at similar price levels when it was split. A presence in almost all sectors (including a fast-growing and lucrative financial services practice), initiatives in so-called cloud computing and healthy operating margins of 20% should make sure that Cognizant keeps investors happy.