Why Satyam Deserves Another Look

Includes: SAY, WIT
by: Alexander Wissel

Few companies seem to have had a more volatile couple of years than Satyam Computer Services ADR (NYSE: SAY). From executive scandals to bungled contracts, overseas lawsuits and fraud, to say Satyam has had its hands full would be an understatement.

The question for investors is whether now is the time to take another look?

Today’s 6% up movement on higher volume marks a breakout from the wedge pattern Satyam has been forming over the last nine months. And while there is still a little ‘hair’ on this puppy, the stock has a lot of positive financial ratios for technical investors.

From a low P/E (price-to-earnings) ratio: 3.79, to book value, earnings growth, sales growth and debt ratios, this company has a lot of traits sought after by technicians.

So what gives?

Well for one it never looks good when your executives are caught cooking the books with fake customers – or when your founder admits to adding more than $1 billion in fictitious cash to the balance sheets. In addition to outright fraud on behalf of a number of employees, there were additional issues on the role played by the auditor in catching these errors.

It resurrects a number of valid fears akin to Enron, and makes anyone wonder if the numbers we are seeing now are correct or another work of fiction.

Then there is the loss of the Punjab & Sind contract to Wipro Limited ADR (NYSE: WIT). While having customers poached by a competitor isn’t unusual. It certainly isn’t a good thing. The BPO (business process outsourcing) industry is fiercely competitive and weak companies don’t last long.

So why Satyam for investors?

Well, my thinking here is much more focused on their recent employee expansion and competitive position in its segment. A real house of cards would have crumbled, and quickly, if the entire company had been built upon deception – as it was in Enron’s case.

As I said before weak companies don’t last long, and the fact they still remain is a testament to their strength.

Satyam has a large list of high profile and high paying customers than haven’t left. And despite the company’s issues, it has managed to add more clients over the past year as international firms cut costs and outsource their tech needs.

The outsourcing trend is nothing new and it will continue. As long as large companies need to have large phone banks of customer service employees, they will continually strive to move these call centers to locations where the can be run cheaply.

The same goes for computer management, engineering and support that large complex web enterprises need to maintain market share and presence. Companies are going to look at their technology costs and continually ask, “Can we get it cheaper somewhere else?”

Not asking that question, i.e. considering overseas outsourcing – however distasteful it may be to most Americans – would be a dereliction of their duty as responsible directors for their stockholders. Outsourcing will continue and few companies are as well placed to pick up that business as SAY.

So for this reason alone I like Satyam Computer Services for a long-term investment under $5.75.

Disclosure: No positions in any security mentioned above.