Saytam Computer: Not Best of Breed but Compelling Valuation (SAY, INFY, CTSH)

 |  Includes: CTSH, INFY, SAY
by: Yaser Anwar

Today I'd like to present a stock that I consider cheap based on its valuation compared to its growth. It is not the best of breed but its valuation makes it a quite appealing, so let's get started.

Satyam Computer Services Limited (SAY), together with its subsidiaries, operates as a consulting and information technology [IT] services company. The company provides various IT services, including, application development and maintenance services, consulting and enterprise business solutions, extended engineering solutions, and infrastructure management services. (Y! Finance)

Catalysts that make SAY a buy:

  • SAY's annual revenue and earnings have been growing at 38% & 62%, respectively. Profit margins are 22.75%. Infosys (NASDAQ:INFY) and Cognizant (NASDAQ:CTSH) both outstrip SAY when it comes to growth and profit margins, but when it comes to valuation SAY is the better bargain. CTSH trades at a multiple of 49 & INFY at 34, whereas SAY trades at just 19. You may say, that CTSH & INFY have more growth hence the premium, I concur. But what you have to look at is, the Forward multiple of SAY is just 19.48 for growth of 23.5% where as CTSH has a Fwd PE of 44 for 33% growth and INFY has a 37 Fwd PE for 29% growth.
  • Wall Street is giving most of the attention to CTSH with 10 Strong buys and INFY with 9, whereas SAY does have lower growth but a better valuation and not as many buy recommendations. SAY also has a smaller institutional ownership compared to INFY and CTSH, which means when SAY reports strong results, like it did last time, analysts and institutions are going to pay more attention, thus appreciating the stock price.
  • Other than valuation, SAY has other good characteristics such as:

  • SAY's efforts to gain share in the U.S. and Europe should begin to show positive results. I expect the company to post solid bookings in coming quarters, especially as SAY leverages its global delivery model.
  • I expect sales to grow 28% in 06 as demand for IT outsourcing should benefit from strength in the public arena, the financial world, and the consumer and communications industries, on a global basis and in the U.S.
  • SAY has a great balance sheet for a tech company. A meagre 0.02 D/E ratio, 696million in cash & a 0.83% dividend yield. SAY is a great company which could get even cheaper; I would be patient but if it fell to 25-26 I would buy this stock and expect steller growth in share price in 6-12 months.
  • Technically speaking (Pls. view graph below): SAY's technicals are nothing to cheer about. Its ADX is reaching 40, signalling an overbought level but when you check the RSI level its close to 30, a signal that deems an oversold level. The TRIX shows that there is no momentum left as it's been in negative territory for quite a while and the MACD that seem to be in oblivion too.
  • Lastly, the technicals are giving mixed signals but I'm a fundamentalist first then a technician. The fundamentals have been improving steadily; with better margins and growth, I'm going to keep a close eye on this stock because after what happened to Texas Instruments (NYSE:TXN), I'm not to sure if I want to be in tech for now.
  • I would recommend the usual 25% position in the stock and wait for it to pull back: this week we will see a lot of economic data and it will be inflationary, hence the Fed will raise rates at least two more times to 5.5%.

    [click on graph to enlarge]

    Disclosure: I don't own any shares of SAY