Computer Task Group Is A Defensive Stock You Should Look At

Jun. 3.13 | About: Computer Task (CTG)

When economic times are uncertain, investors turn to so-called defensive stocks that provide them with a sense of security through consistent dividends and stable returns. Computer Task Group (Nasdaq:CTGX) should readily fill this space in their portfolios.

Computer Task Group is an industry leader in offering IT staffing as well as IT solutions. It has successfully made the shift from providing staff to manufacturing companies to four new industries, with healthcare eventually becoming the company's main focus. Many businesses have increasingly turned to staffing services rather than maintain a permanent workforce. Hence, revenues in the U.S. staffing industry are seen to reach $134.4 billion in 2013, with IT staffing services being one of the segments seen to grow in market size beyond pre-recession peaks.

Consistent Revenue Growth

In recent years, CTGX has been focusing its efforts in the healthcare sector on electronic medical records, or converting paper records into digital formats. This has proven to be a big revenue generator for the company, resulting in revenues from healthcare growing from 27% in 2008 to 33% in 2012. The company presently has 15 electronic medical records projects, with another three set to begin in spring after being pushed back from the first quarter. Although IT solutions makes up just 41% of total revenues compared with 59% for IT staffing, the solutions business ultimately is the more profitable, generating $0.10 of profit for every $1 of revenue, compared with staffing, which only generates $0.01 of profit. In the future, the company intends to gradually shift the mix to make the shares closer to 50/50.

As a result of its successful shift to the healthcare business, the company's revenues have been consistently growing. From 2009 to 2012, revenue grew by nearly 54%, from $275.6 million to $424.4 million. Similarly, diluted income per share grew from $0.38 to $0.96 over the same period. For the first quarter of 2013, revenue grew by 5% to $108.5 million from $103.4 million, while diluted net income per share grew from $0.20 to $0.24. Meanwhile, the gross margin, which represents how much of each dollar of revenue the company would keep as profit, is presently at $0.21, which compares favorably with the industry average of $0.29.

Why Invest?

Why invest in Computer Task Group? One reason is that its share prices have shown consistent growth. In the first quarter of 2012, its stock was trading at a range of $13.39 to $15.45. By the fourth quarter, the range had grown to $16.20 to $19.14. At present, the stock is trading at $22.32 (as of May 31). In addition, the company recently reinstated its dividend payouts, paying $0.05 per share in both the first and second quarters of the year. According to CEO James Boldt, the reinstatement of the dividends is an expression of CTGX's faith in its future as well as the significant cash flows it has been able to generate in recent years.

Also expected to fuel future growth is the Obama administration's healthcare reforms. This has allocated some $19 billion to fund electronic medical records systems, although only some $1 billion has been disbursed, as well as additional reimbursement funding worth $40 billion to $45 billion in from Medicare and Medicaid for healthcare providers and institutions that adopt electronic medical records systems. The company has also positioned itself by providing services that would help make delivery of healthcare more efficient and thus, more affordable as well.

Its operating margins have shown consistent growth over the past five years, averaging $0.218 and reaching a peak of $0.224. Net margins, or the percentage of each dollar of revenue that translates to profits, averaged 2.7% for the period and had a peak of 3.8 percent.

Its guidance for the second quarter and full year 2013 shows that the company expects growth to be solid. For the second quarter, revenues are expected to be within the $111 million to $113 million range, with diluted net income at $0.23 to $0.25. For the full year, revenues are expected to be within the $450 million to $460 million range while diluted net income is at $1.02 to $1.12. Growth for the coming year is expected to come from a variety of sources apart from the projects that are already under way, including its ICD-10 remediation engagements, its consulting work for companies on health reform requirements, the growth of its application management practice and its new genomics offerings. However, there have been some concerns over the slow adoption by smaller hospitals of electronic medical records, due to the high upfront investment involved.

In addition, it should be noted that many of the top hedge funds have included CTGX in their portfolio, including Royce & Associates, which held some $9 million worth of stock, followed by McKinley Capital Management with $1.8 million.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.