Our first pick today is an Indian IT company who beat EPS estimates by $0.08 last quarter. Next, we are cleaning house a bit by selling two previous ideas.
Buy: WNS Holdings Limited (WNS)
From Cabot Stock of the Week
India-based WNS Holdings Limited (WNS) is an information technology company that offers business process outsourcing (BPO) for global clients in the banking, financial insurance and travel industries. The company has more than 36,000 employees in its 54 delivery centers in China, Costa Rica, India, the Philippines, Poland, Romania, South Africa, Sri Lanka, Turkey, the U.K. and the U.S. Its more than 350 clients benefit from WNS Holdings’ expertise in customer care, finance and accounting, human resource solutions, research and analytics and industry specific back-office and front-office processes. The secret of WNS Holding’s success seems to be a combination of vertical (industry-specific) expertise combined with top-notch outsourcing skills that makes its consultants a valuable part of a client’s business.
Diversification across both sectors and geographies is one key to WNS Holdings’ consistency. The company got 26% of its fiscal 2018 revenue from insurance clients, 19% from the travel & leisure industry, 18% from the manufacturing/retail/media/entertainment sector, 15% from healthcare businesses, 9% from utilities and the rest from other sectors. North American clients contributed 41% of revenue, the U.K. 34%, Australia 9% and the balance came from the rest of the world.
BPO has been a key market for Indian companies for a long time, and WNS Holdings has been at it since 1996, increasing its diversification and stability all the while. The company has grown earnings in 12 of the last 14 years, including a 29% jump in fiscal 2018, which ended in March. After four years of single-digit revenue growth, revenue also popped higher by 26% in fiscal 2018.
WNS Holdings is a fairly defensive pick, as we acknowledge the general uncertainty about the economic health of China due to the evolving trade dispute with the U.S. While the company is headquartered in India, its fortunes are not tied to a specific country or region. There is likely to be plenty of growth happening to at least part of the company’s client base at any time.
And the chart for WNS is another big selling point. While emerging markets have been breaking out in a hot sweat over the last couple of months, WNS has been rock steady. The weekly and daily charts show that there has been plenty of volatility, but all pullbacks are short (the longest being a six-week correction to end 2017), with buyers moving back in quickly. The stock hit an all-time high in July, which is a very good thing relative to most emerging market names.
WNS Holdings reported its fiscal first quarter results on July 19, with analysts expecting revenue of $193.6 million and earnings of 51 cents per share. The actual numbers came out at $200 million in revenue, with earnings of 59 cents per share.
Despite the robust beat on both the top and bottom lines, WNS pulled back after that earnings report, dipping from its high of 54 to a low of 48 on July 30. But it’s the stock’s behavior since that pullback that makes it really interesting. Through August and September, WNS has traded sideways in a tightening range, basically trading flat with support at 50.
With a reasonable P/E ratio of 22, WNS is buyable here or on any normal weakness that pulls it below 50. The longer the stock trades sideways and flat, the greater the likelihood that it will enjoy a long run when the next catalyst for bullish behavior arrives. The company hasn’t announced its fiscal Q2 earnings report, but it will likely come out in the third week of October.
Timothy Lutts, Cabot Stock of the Week, www.cabotwealth.com, 978-745-5532, October 2, 2018