Is Convergys a Value Play At Current Levels?

One of the outstanding phrases of Mart Tier's book, Winning habits of Warren Buffet and George Soros, is the way he describes Graham's selection of stocks: Cigarette Butts with a few more puffs left. In essence, he wants to portray the first golden principle of value investing: buying stocks on sale, and the second: there should be a safety factor.

After going through my laundry list of outsourcing stocks, I found a company that is somewhat near to Graham's criteria. Convergys (CVG), which is a a seasoned outsourcing player. Its market cap as of Aug-10/2007 was $2.36bn. The stock had peaked to $27 at the beginning of the year, since then has lost 30% and is priced around $17.00 (as of Aug-10/2007).

Its book value as of Mar-31/2007 was $1.48bn, with $560 million as net tangible assets and $880mn as goodwill. The total number of employees as of Dec-31/2006 was 75,000. Out of this total, 67,500 worked in customer care, 4,000 work in Information management, 2,500 work in employee care.

Important financial figures: The company's net income has increased from $111mn in 2004 to $166mn in 2006. The operating cash flow has increased from $195mn to $353mn. Another important thing to note is its income tax expense. Income before tax during this period changed from $173mn to $244mn, and income tax expense recently increased from $61.9mn to $78.4mn, although the income tax expense for 2005 was $90.8 million. It should be noted the company's net income was $145mn in 2002 and $171mn in 2003.

Reduction in margins: Operating income in 2003 was $292mn and revenues were $2,288 million. (12.76%). Operating income in 2006 was $252mn and revenues were $2,789mn (9%).

Value of employees in outsourcing business: The cornerstone of any business is its employees. But their value is never mentioned in the financial statements, although their liability in terms of benefit obligations are minutely analyzed. This factor becomes all the more important when valuing any service related business. At the end of the day, it is the billable hours of these men and women that bring revenues to the company.

CVG 1-yr chart:

Comments

[ratsharp:]

spreadsheets puke numbers better than paragraphs .. plz use that ..
so shd we buy based on your "analysis" or should we sell. Coz fence sitting sure hurts my bottomline... and reading incessant info hurts my eyes..

2007 Aug 14 09:41 PM

[Dayanand Me...:]

STRONG BUY.....provided you have the stomach for value investing. I mean an investment time horizon of around five years...

2007 Aug 14 10:28 PM