Top IT and BPO Services Stocks Recommended by JP Morgan

J.P. Morgan published a report entitled “IT and BPO Services” on January 12, 2012. The report isn’t publicly available but we will share its main points. In the report, Tien-tsin Huang, Puneet Jain, and Dick Wei share their opinion of the IT and BPO Services stocks performing better relative to the S&P 500 in 2012. Stocks that have a high mix of offshore delivery, have the ability to cut costs of clients, have high exposure to healthcare, and have investments with a long-term impact on growth profile are preferred. The overall IT services budget is expected to be flat “with a potential for modest declines” as the macroeconomic environment worsens. Here are the stocks discussed in the report:

Accenture plc (ACN) operates as a management consulting, technology services, and outsourcing company. It has been given an Overweight rating by J.P. Morgan (JPM) due to its strong client relationships. Accenture is able to meet the needs of its clients faster than its competitors, giving it an edge over them. The company is in a position to execute its high return-on-investment projects as well as cutting costs for its clients. The company’s outsourcing may also be able to pick up on any slack. Accenture’s stock is relatively defensive to the macroeconomic uncertainties, according to J.P. Morgan. Shares of the company are currently trading at $53.3 per share and are expected to reach a price target of $62, indicating a potential upside of 16%. Lansdowne Partners has the largest stake in Accenture among the 350+ hedge funds we are tracking.

Cognizant (CTSH) provides information technology, consulting, and business process outsourcing services. It has been given an Overweight rating by J.P. Morgan as they believe that Cognizant is going to grow at industry-leading rates. The vendor consolidation trend is expected to be beneficial for the company. If the current macroeconomic uncertainties persist, Cognizant is expected to grow around 15-20%. If not, it is expected to grow in the high 20s or low 30s. The company has focused on client relationships and the opening of new markets, enabling it to grow faster than its competitors. Shares of the company are currently trading at $68 and are expected to go north of $85 per share. Lee Ainslie’s Maverick Capital initiated a new position in CTSH during the third quarter.

ExlService Holdings, Inc. (EXLS) is a provider of outsourcing and transformation services. It is the top pick from within J.P. Morgan’s coverage universe and has been given an Overweight rating. With clients looking to decrease costs, and outsource their BPO operations, J.P. Morgan expects ExlService to benefit. J.P. Morgan also expects the company to reach a revenue growth near its top end target of 15-20%.  Its relatively inexpensive valuation is going to provide it with an upside opportunity. It has also lowered its business risk over the last few years. Shares of ExlServices are currently trading at $22.9 per share and are expected to reach a price target of $28, indicating a potential upside of 22%. Anand Parekh initiated a brand new position in EXLS during the third quarter.

Genpact (G) engages in the provision of business process and technology management services. J.P. Morgan has given the company an Overweight rating because it is one of the premium offshore BPO companies in terms of its service capabilities, size, and diversification. Genpact is expected to benefit as its clients cut their internal costs. The company’s long-term growth profile is likely to appreciate as the new CEO looks to reinvest the margin upside back into the business. Shares of Genpact are currently trading at $14.5 and are expected to reach a price target of $18 per share. Ricky Sandler and Chase Coleman are among the hedge fund managers with large positions in Genpact at the end of September.

Syntel, Inc. (SYNT) engages in the provision of information technology and knowledge process outsourcing services. It has been given an Overweight rating by J.P. Morgan. If the company is looking to maintaining its STT business, it needs to offer a price discount, according to J.P. Morgan. Also, the company’s AXP business is likely to underperform, resulting in a negative impact on its growth profile. A depreciation of the rupee, on the other hand, is expected to provide a margin upside and will buffer earnings growth. According to J.P. Morgan’s bearing outlook, Syntel’s financial expenditure is likely to create tailwinds that will protect its earnings growth. Shares of the company are currently trading at $45.5 per share and are expected to reach a price target of $55. Jim Simons’ Renaissance Technologies cut its stake in SYNT by 29% during the third quarter.

VanceInfo (VIT) provides information technology consulting services. It has been given an Overweight rating by J.P. Morgan. The company has a relatively inexpensive valuation that, together with secular growth trends, will allow the company to outperform its peers in 2012. Despite an expansion into the financial services, the Huawei overhang is expected to slow down multiple expansions. Shares of VanceInfo are currently trading at $13.7 per share and are expected to reach a price target of $20. Steadfast Capital and Emerging Sovereign Group are among the hedge funds with VIT holdings. 

Virtusa Corp. (VRTU) provides information technology consulting, and implementation and application outsourcing services. It has been given a neutral rating by J.P. Morgan. Virtusa’s capabilities and its growth profile have seen a significant improvement over the last few years. However, J.P. Morgan is of the opinion that the company’s management needs to maintain a record of meeting its estimates. In a favorable macroeconomic environment, Virtusa’s application rationalization abilities are expected to grow. Shares of the company are currently trading at $14.7 per share and are expected to reach a price target of $16.

Some of the other companies mentioned in the article are iSoftstone (ISS), WNS Holdings Ltd. (WNS), and Computer Sciences Corporation (CSC). iSoftstone has an Overweight rating while both WNS Holdings and Computer Sciences Corporation have been given an Underweight rating. Shares of WNS Holdings and Computer Sciences Corporation are currently trading at $9.9 and $24 respectively, while shares of iSoftstone are currently trading at $9. Stephen Mandel’s Lone Pine Capital had $33 million invested in ISS at the end of September.