3 Mid-Tier IT Companies To Include In Your Portfolio

Sep.11.13 | About: iGATE Corporation (IGTE)

Mid-tier IT companies have struggled to compete with the top tier IT companies in the recent past. Projects were hard to come by because they mostly were grabbed by the big companies. But, as the macro-economic environment and customer sentiments are improving, IT spending again has taken a leap. This has reduced the competition and pricing pressure for the mid-tier IT companies. Also, with a better learning curve and economies of scale, these companies have improved on their margins. In this article, I am analyzing three high-growth, mid-tier IT companies that have posted strong quarterly results and have strong a projects pipeline, making me optimistic about their future growth prospects.

Strong core offering coupled with product and geographic diversification

ServiceNow (NYSE:NOW) recently reported a strong second quarter, with Y/Y billing growth of 63% beating the consensus estimate of 57%. Its revenue increased by 80% to $102 million. The company has raised its guidance for the third quarter. The platform usage of the company is strong and its deal size is increasing. The company's renewal rate is still strong, with 94% of its clients renewing their usage of its platforms. Watch out for this stock because upward rally will continue.

The company has had a good growth even beyond its core ITSM (IT Service Management) market. The company has announced its intention to launch its analytical services this August, based on its Mirror42 acquisition. I believe these initiatives will drive future growth.

The company also has significant opportunity to expand globally. Currently the company is building data centers in Mexico, Hong Kong, and Singapore. The company is expanding in Asia, also, where it's current revenue is only 6%. Asia provides an opportunity for the company to increase its revenue. Overall, I believe the company will grow faster in the coming year.

Although the company is trading at a high P/E, I believe it is still in nascent stages of its growth and has good future growth prospects.

Strong pipeline and recovering end markets

Virtusa Corp (NASDAQ:VRTU) shares have given a return of 62% year to date against NASDAQ's 23% return. The company reported strong first quarter results. As the company's pipeline is strong and its deal conversion has reached its normal level, I expect the future quarters also will be strong. The stock looks attractive at its current market price.

Although, the company's margins this quarter were hurt by its hedging of rupee [INR] against dollar [USD], the business fundamentals remain strong. The company has strong pipeline growth with some large deals which I expect will materialize in the next quarter. This will drive revenue and profit.

During the recent quarter, the European market and the vertical communications and telecommunications have declined. Recent data in the European region has shown major signs of recovery in the economy. So, I believe that more projects will come to the company. Also, the change in the financial sector regulations will lead to more outsourcing demand that will be a catalyst for growth. The communications and telecom sector also has bottomed out and is showing signs of recovery. So I am bullish on the company's prospects.

The company's forward P/E of 15.32 and PEG ratio of 0.99 indicate that the company is undervalued and therefore is good to have in one's portfolio.

Big deals and improved sales execution

iGate Corporation (NASDAQ:IGTE) stock has given a year to date return of 53.60% against NASDAQ's 23%. The recent quarterly results and large deals' win put at rest speculations that the recent CEO departure negatively affected the company. The strong dollar against rupee and better utilization helped the company post impressive second quarter results. I believe the stock is a good bet based on its strong project pipeline and stabilizing pricing.

In the recent quarterly result the company has talked about big deals and the macro environment that appears positive. The company highlighted the three big $100+ million dollar, multi-year deals. In total, the company signed 11 deals this quarter, which is a record for the company. Although the management has not given any guidance for the third quarter, I believe its margin should improve because the rupee is expected to further depreciate against the U.S. dollar.

We believe that the company's sales transition is over and now has started delivering dividends. The company has invested in an effective sales team, the result of which is visible in North America sales as the sales focus and execution improved. Also, the improving investment by clients in IT will serve as a catalyst for the company.

The forward P/E of 11.68 and PEG ratio of 0.88 indicates that analysts are undervaluing this company's stock. I recommend taking a long position in this company.

Conclusion: The above three companies have shown outstanding returns year to date as compared to the Index. The quarterly results were above the consensus estimates. I believe these companies possess tremendous growth potential. The project pipeline remains strong for these companies and I expect they will improve on margin in the coming quarter as more projects spread over the operating expense. I am bullish on these stocks.

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.