Investors cash in as companies send jobs abroad

[MORTARDUDE]

http://www.usatoday.com/money/market...offshore_x.htm


By Matt Krantz, USA TODAY
Rather than sweating over U.S. jobs migrating to India and China, some investors are trying to profit from the flight instead.
Shares of "offshoring" companies, which employ scores of high-tech workers that earn a fraction of their U.S. counterparts, have been getting noticed on Wall Street. U.S. companies are hiring these companies to perform back-office tasks such as software design and call centers for a fraction of what they would cost here.

Some investors are seeing this as a way to get a piece of what could be the next revolution to sweep business, much as reengineering did in the '80s and the Internet did in the '90s.

Offshoring is "a multiyear and irreversible trend," says Ashish Thadhani, analyst at Brean Murray Research.

Recently, though, investors who missed the initial run-up have gotten another chance. Worries over the jobless recovery have turned offshoring into a political pi?ata and have knocked the stocks down sharply the past few weeks.

Despite concerns in the stock market about the political risks, the industry has powerful trends working in its favor. The offshoring industry could potentially turn into a powerhouse.

Forrester Research estimates that by 2015, 3.3 million services industry jobs in the USA and $136 billion in wages will move offshore to countries like India, Russia, China and the Philippines. Consulting firm McKinsey says 400,000 jobs have been offshored, and offshoring will grow as much as 40% a year the next five years.

Facing such demand, the companies providing offshoring services need to ramp up fast.

The most direct way for investors to cash in on this trend is by buying shares of the offshoring companies. But each of these companies, while they may seem very similar at first, comes with its own strengths and weaknesses:

?Infosys (stock symbol: INFY; Wednesday close: $78.41). If you're looking for the blue chip in outsourcing, this is it.

The Bangalore, India-based company is expected to earn $269 million in the current fiscal year that ends at the end of March, Thadhani says. That's 30% higher than the second-most-profitable offshoring player, Wipro.

Infosys continues to grow rapidly. Thadhani says revenue should hit $1.1 billion in the fiscal year ending in March, a 41% gain over the previous year.

For these reasons, the company also has the highest market value among the offshoring players, of $10.4 billion.

Even after the recent pullback, the shares are sporting a 20% gain for the past year, giving them a price-earnings ratio based on expected fiscal 2004 earnings of 38. Though that is well above the S&P 500's 19 P-E, the company is expected to average 27% annual earnings growth the next five years, Thomson First Call says.

?Wipro (WIT; $40). If the industry has an aggressive player, it's Wipro. In addition to nuts-and-bolts technology outsourcing, it has a line of business where Indian researchers conduct research and development for customers. It has also boosted its call center business with a recent acquisition.

Thadhani expects the company, which also is based in Bangalore, to post $1.2 billion in revenue the current fiscal year, making it the largest player based on revenue.

But the stock trades at 44 times expected 2004 earnings, and despite the higher P-E, Wipro is not expected to grow much faster than Infosys over the next five years.

?Others. Satyam Computer (SAY; $19.27), Cognizant Technology (CTSH; $42.12) and Syntel (SYNT; $24.72) round out the list, being the next-largest players.

Certainly there are risks investing in these companies, most of which trade as American depositary receipts and are based outside of the USA.

Some investors are looking at the other way to profit from offshoring: U.S. companies that use offshoring. They're betting these companies will reduce their expenses, resulting in higher earnings and stock prices.

But finding these companies can be quite difficult. There are no requirements for companies to disclose the information to investors, and many would prefer not to because of the political sensitivity.

Even so, Thadhani says there are three pioneers of offshoring: American Express (AXP; $50.03), Citigroup (C; $49.79) and General Electric (GE; $29.18). "Those three might have discovered offshoring before the Indians did," he says. He estimates GE saves $340 million a year by putting 20,000 employees in India.

But will the offshoring opportunity fizzle on investors if the political hubbub manifests itself into more protectionism?

Not likely, says Sameer Nadkarni, analyst at W.R. Hambrecht. He says most efforts to block offshoring have died and that the political furor will quiet once job creation resumes in the USA.

"The political noise makes people concerned," he says. "But when executives and company management are running a business, they must look at the best way to run the business."