Tweet
It’s Saturday in July. I’m sitting in my hammock with an ice cold Heineken in my hand. I take that first slurp. Oh it is so cold and delicious. But wait, my lawn needs to be mowed and my hedges need to be trimmed. Do I jump up and take care of these annoying responsibilities? Of course not, I have a landscaper come and do it. How can I afford a landscaper? I don’t really want to know, but he has a lot of people who work very hard for him who work for a low wage. I guess there are a lot of people in the world who are grateful to find work.
Flash forward to that evening. I’m setting up a wireless router in my house, so that my kids can take their laptops all over the house and play video games online all day instead of doing their homework. Perfect! Of course I have no clue how to configure the wireless router and I call the guy from LinkSys on the phone. However, after drinking Heinekens all day, $$$MR. MARKET$$$ has to siss first. When I get back on the phone, there is a friendly voice from a man who seems very intelligent, but very far away. He fixes my problem while using common American vernacular such as “How about those Bears” and “Boy….Jessica Simpson is a hottie”. Of course this guy lives in the Phillipines, is reading from a script, and wouldn’t know Jessica Simpson from OJ Simpson. The bottom line is however, my wireless router was up and running in no time.
The conclusion: there are a lot of smart hard working people in the world who will work for a very low wage and do just as good a job as a fat lazy overpaid American. Wouldn’t it be great if you could build a company with these highly educated people and not pay them squat and have them do whatever you tell them to do? Don’t blink, because there already is:
Today I bought stock in PeopleSupport (PSPT) at 22.59. I will sell it in 4 – 6 weeks at 26.04. Here’s why I like PSPT:
PSPT stock is up 129% in the last 12 months yet its PE is only 19. Look at this awesome chart.
The 12 month R^2 correlation coefficient is 0.92, meaning that there is extremely strong and unwavering price appreciation for this stock. And why shouldn’t there be?
PeopleSupport is a leading global business process outsourcing (BPO) provider. They operate outsourcing operations in the Philippines, Costa Rica and the United States. From these operational locations, they provide several types of services to their clients, including customer management, accounts receivable management, and transcription and captioning services. PeopleSupport now has over 7,000 employees. Basically it does all of the crap that your company does not want to do, and it does it better and cheaper. Not only that, but they work 24/7, making efficient use of their office space assets. PeopleSupport employees in the Philippines typically work at night, when it's daytime in the U.S. and when most customer service calls come in. Their transcription and captioning services can be done at night, during off-hours in the Philippines.
PeopleSupport's Fortune 500 clients see offshore outsourcing as part of a worldwide strategy to optimize the people supply chain, so that work is done wherever it can be done better, at lower cost. Clients look to PeopleSupport as a partner delivering value-added services that have an immediate impact on revenue, and a long-term impact on brand equity. The world is changing. Companies are outsourcing. It is no longer unusual or despicable to remove overpriced and antiquated support departments from your payroll. This trend makes companies more profitable, and more companies will choose to do it as their competitors cost structures are outperforming them. PSPT’s revenue growth has been significant as a result of this trend.
The Philippines have thousands of people lining up to take these jobs. Not only that, but these people are often highly educated and have master’s degrees. Your boss wants that analysis done and on his desk by morning? No problem, your friends in Manila will take care of it for you while you’re out guzzling Heinekens with your friends. This is pure and simple, a labor arbitrage opportunity.
The Philippines is very Americanized in many respects, as a former U.S. colony in World War II. Their schools and legal system, and even their accounting system, are based on an American model. And culturally, the employees wear iPods and listen to the same music and watch the same movies. They even like many of the same sports. All the schools there teach English as a requirement. So the kids graduate speaking excellent and very non-accented English. Though India is another popular spot for outsourcing, PeopleSupport opted to establish operations in the Philippines because the accents and culture are more Americanized. Wages in India are about 15% lower than what the company pays in the Philippines (about $3 an hour), but familiar accents matter more to American companies than cut- rate costs. In fact, thanks to government support and a so-far ample pool of educated English speakers willing to work the overnight shift, business-process outsourcing is the Philippines’ fastest-growing industry. Remember, even though they are low wage, these employees are highly educated. This is not your typical “You want fries with that?” minimum wage worker. Chances are the person you get on the phone with in the Philippines is a lot smarter than you are.
PeopleSupport’s biggest business, at 85% of revenue, is outsourcing customer management services. This includes handling calls and e-mails from clients' customers making travel reservations, addressing questions on loans and providing tech support. The company also handles accounts receivable management, which involves making calls for creditors to collect overdue receivables on consumer debt. “Hello sir..you owe us $50,000. Excuse me sir? You told me to go F myself? How about those Bears?”
Actually, when you talk to PeopleSupport’s clients, they only have good things to say, which has been reflected in the strong growth in repeat business. When you see significant growth from existing clients, it's important. In view of the robust demand, the company intends to raise its operational seat count to nearly 7300 by end-1Q07, which exhibits a 45% rise from the 3Q levels. Remember, these guys aren’t going to go through the trouble of increasing staff if they have no intention of keeping busy.
Ok Ok we get it. Move jobs out of the USA. Sounds like a plan, but does it make money?
Last quarter (November), PeopleSupport announced record results for their 3rd quarter. Revenues were up 85% year-over-year, the third quarter of 2006 was their highest growth quarter in 17 quarters of consecutive revenue growth. PeopleSupport reported record revenues of $30.1 million, as compared to $16.3 million in the third quarter of 2005. This growth was driven by new clients signed in the first half of 2006 as well as from existing clients. Revenue growth has been outstanding, though earnings growth has been spotty due to the need to invest in growth. However, earnings should be fine in the long run because of a strong return on invested capital of 26% and because the stock has a very reasonable valuation for a fast-paced small cap. Remember, the hardest thing to grow is sales and your customer base. Earnings almost always follow when you have a good business model.
The higher-than-expected costs last year came primarily in areas that should
strengthen the business long term (early center opening, hiring
more expatriate management, strengthening financial controls), and are more
symptomatic of growing pains for a new public company with a small revenue
base than anything else. In fact, if we didn’t see these costs, I’d be more worried, because it would mean that PeopleSupport would be pinching pennies (not good for a growth company).
For the full year of 2006, the company expects revenues to be between $108.5 million and $109.0 million, or an increase of approximately $6.0 million from previous guidance. For the same period, the company expects diluted earnings per share to be $0.64 to $0.65 based on approximately 19.0 million shares outstanding on a diluted basis
PSPT represents the best way to play the outsourced BPO market. There will be continued strong growth to drive multiple expansion in 2007. Full year earnings will be reported in late Feb or early March. Expect them to have higher revenue guidance included. Organic revenue growth accelerated to the "high 60% range" in Q306 and the sustainable growth rate for 2007 will be above current consensus expectations for 32% rev growth.
Why do I think this? On January 11, 2007, PeopleSupport Properties Philippines Inc. acquired a 2,731 square meter lot (the "Lot") in the Bonifacio Global City development located in Metro Manila, Philippines for approximately $6.8 million U.S. dollars. PeopleSupport intends to build an additional business process outsourcing center on the Lot, which would be wholly owned and controlled by PeopleSupport's Philippine operating subsidiary. Now why on earth would PeopleSupport buy a parking lot to put up a building unless they KNEW that more growth was ahead…hmmm? Would you buy a parking lot if you didn’t need it?? And with no debt and $140 million in the bank after a follow-on offering in November, PeopleSupport is actively looking for acquisitions, hoping to keep growing in the Philippines and beyond.
So let’s take a close look at earnings. Since net income of PSPT is about 36% of revenues, the new revenues that are expected to be generated next year will drive earnings substantially. ANAL-ysts project FY 2006 revenues to be $109 MM and FY 2007 to be $145 MM. They expect this to generate $0.76/share of earnings in 2007. Brilliant, they are using the company’s own numbers. My 12 yr old could have done that. I wonder how much these ANAL-ysts get paid to do the same thing.
Remember, PSPT has surprised significantly on the upside in the last 4 quarters. $$$MR. MARKET$$$ believes that PeopleSupport will end up with FY 2006 revenues of $112 MM and then the big year, 2007, will be $189 MM. The incremental $44 MM revenue over and above the ANAL-ysts projected $145 MM will generate (36% x 44 MM) $16 MM in earnings, or an incremental $0.85/share over and above the ANAL-yst $0.76/share projection. This means that PSPT should earn $1.61/share in 2007. If you take the existing PE multiple of 19 and multiply it by these earnings, you end up with a share price of $30.59, which is past my sell target.
The CEO, Lance Rosenzweig is also optimistic:
“Our excellent performance is also a result of our continued progress in expanding our revenue stream across a portfolio of services and geographies. We perform over 100 processes and manage over 4.5 million customer communications per month for our clients. PeopleSupport is executing on its strategy to become a diversified high performance outsourcer for the global enterprise."
Next time you make a phone call, ask who you are speaking with…and “How about those Bears?”
If you like this write up, tell me about it, and email it on to your friends. If you really like this write up, and end up making money on this stock pick, please think about donating $1.00 (yes one dollar) to the football playing boys of PHS. You can do it in 30 seconds at http://www.golittletigers.com
I am HUGE!
$$$MR. MARKET$$$
Flash forward to that evening. I’m setting up a wireless router in my house, so that my kids can take their laptops all over the house and play video games online all day instead of doing their homework. Perfect! Of course I have no clue how to configure the wireless router and I call the guy from LinkSys on the phone. However, after drinking Heinekens all day, $$$MR. MARKET$$$ has to siss first. When I get back on the phone, there is a friendly voice from a man who seems very intelligent, but very far away. He fixes my problem while using common American vernacular such as “How about those Bears” and “Boy….Jessica Simpson is a hottie”. Of course this guy lives in the Phillipines, is reading from a script, and wouldn’t know Jessica Simpson from OJ Simpson. The bottom line is however, my wireless router was up and running in no time.
The conclusion: there are a lot of smart hard working people in the world who will work for a very low wage and do just as good a job as a fat lazy overpaid American. Wouldn’t it be great if you could build a company with these highly educated people and not pay them squat and have them do whatever you tell them to do? Don’t blink, because there already is:
Today I bought stock in PeopleSupport (PSPT) at 22.59. I will sell it in 4 – 6 weeks at 26.04. Here’s why I like PSPT:
PSPT stock is up 129% in the last 12 months yet its PE is only 19. Look at this awesome chart.
The 12 month R^2 correlation coefficient is 0.92, meaning that there is extremely strong and unwavering price appreciation for this stock. And why shouldn’t there be?
PeopleSupport is a leading global business process outsourcing (BPO) provider. They operate outsourcing operations in the Philippines, Costa Rica and the United States. From these operational locations, they provide several types of services to their clients, including customer management, accounts receivable management, and transcription and captioning services. PeopleSupport now has over 7,000 employees. Basically it does all of the crap that your company does not want to do, and it does it better and cheaper. Not only that, but they work 24/7, making efficient use of their office space assets. PeopleSupport employees in the Philippines typically work at night, when it's daytime in the U.S. and when most customer service calls come in. Their transcription and captioning services can be done at night, during off-hours in the Philippines.
PeopleSupport's Fortune 500 clients see offshore outsourcing as part of a worldwide strategy to optimize the people supply chain, so that work is done wherever it can be done better, at lower cost. Clients look to PeopleSupport as a partner delivering value-added services that have an immediate impact on revenue, and a long-term impact on brand equity. The world is changing. Companies are outsourcing. It is no longer unusual or despicable to remove overpriced and antiquated support departments from your payroll. This trend makes companies more profitable, and more companies will choose to do it as their competitors cost structures are outperforming them. PSPT’s revenue growth has been significant as a result of this trend.
The Philippines have thousands of people lining up to take these jobs. Not only that, but these people are often highly educated and have master’s degrees. Your boss wants that analysis done and on his desk by morning? No problem, your friends in Manila will take care of it for you while you’re out guzzling Heinekens with your friends. This is pure and simple, a labor arbitrage opportunity.
The Philippines is very Americanized in many respects, as a former U.S. colony in World War II. Their schools and legal system, and even their accounting system, are based on an American model. And culturally, the employees wear iPods and listen to the same music and watch the same movies. They even like many of the same sports. All the schools there teach English as a requirement. So the kids graduate speaking excellent and very non-accented English. Though India is another popular spot for outsourcing, PeopleSupport opted to establish operations in the Philippines because the accents and culture are more Americanized. Wages in India are about 15% lower than what the company pays in the Philippines (about $3 an hour), but familiar accents matter more to American companies than cut- rate costs. In fact, thanks to government support and a so-far ample pool of educated English speakers willing to work the overnight shift, business-process outsourcing is the Philippines’ fastest-growing industry. Remember, even though they are low wage, these employees are highly educated. This is not your typical “You want fries with that?” minimum wage worker. Chances are the person you get on the phone with in the Philippines is a lot smarter than you are.
PeopleSupport’s biggest business, at 85% of revenue, is outsourcing customer management services. This includes handling calls and e-mails from clients' customers making travel reservations, addressing questions on loans and providing tech support. The company also handles accounts receivable management, which involves making calls for creditors to collect overdue receivables on consumer debt. “Hello sir..you owe us $50,000. Excuse me sir? You told me to go F myself? How about those Bears?”
Actually, when you talk to PeopleSupport’s clients, they only have good things to say, which has been reflected in the strong growth in repeat business. When you see significant growth from existing clients, it's important. In view of the robust demand, the company intends to raise its operational seat count to nearly 7300 by end-1Q07, which exhibits a 45% rise from the 3Q levels. Remember, these guys aren’t going to go through the trouble of increasing staff if they have no intention of keeping busy.
Ok Ok we get it. Move jobs out of the USA. Sounds like a plan, but does it make money?
Last quarter (November), PeopleSupport announced record results for their 3rd quarter. Revenues were up 85% year-over-year, the third quarter of 2006 was their highest growth quarter in 17 quarters of consecutive revenue growth. PeopleSupport reported record revenues of $30.1 million, as compared to $16.3 million in the third quarter of 2005. This growth was driven by new clients signed in the first half of 2006 as well as from existing clients. Revenue growth has been outstanding, though earnings growth has been spotty due to the need to invest in growth. However, earnings should be fine in the long run because of a strong return on invested capital of 26% and because the stock has a very reasonable valuation for a fast-paced small cap. Remember, the hardest thing to grow is sales and your customer base. Earnings almost always follow when you have a good business model.
The higher-than-expected costs last year came primarily in areas that should
strengthen the business long term (early center opening, hiring
more expatriate management, strengthening financial controls), and are more
symptomatic of growing pains for a new public company with a small revenue
base than anything else. In fact, if we didn’t see these costs, I’d be more worried, because it would mean that PeopleSupport would be pinching pennies (not good for a growth company).
For the full year of 2006, the company expects revenues to be between $108.5 million and $109.0 million, or an increase of approximately $6.0 million from previous guidance. For the same period, the company expects diluted earnings per share to be $0.64 to $0.65 based on approximately 19.0 million shares outstanding on a diluted basis
PSPT represents the best way to play the outsourced BPO market. There will be continued strong growth to drive multiple expansion in 2007. Full year earnings will be reported in late Feb or early March. Expect them to have higher revenue guidance included. Organic revenue growth accelerated to the "high 60% range" in Q306 and the sustainable growth rate for 2007 will be above current consensus expectations for 32% rev growth.
Why do I think this? On January 11, 2007, PeopleSupport Properties Philippines Inc. acquired a 2,731 square meter lot (the "Lot") in the Bonifacio Global City development located in Metro Manila, Philippines for approximately $6.8 million U.S. dollars. PeopleSupport intends to build an additional business process outsourcing center on the Lot, which would be wholly owned and controlled by PeopleSupport's Philippine operating subsidiary. Now why on earth would PeopleSupport buy a parking lot to put up a building unless they KNEW that more growth was ahead…hmmm? Would you buy a parking lot if you didn’t need it?? And with no debt and $140 million in the bank after a follow-on offering in November, PeopleSupport is actively looking for acquisitions, hoping to keep growing in the Philippines and beyond.
So let’s take a close look at earnings. Since net income of PSPT is about 36% of revenues, the new revenues that are expected to be generated next year will drive earnings substantially. ANAL-ysts project FY 2006 revenues to be $109 MM and FY 2007 to be $145 MM. They expect this to generate $0.76/share of earnings in 2007. Brilliant, they are using the company’s own numbers. My 12 yr old could have done that. I wonder how much these ANAL-ysts get paid to do the same thing.
Remember, PSPT has surprised significantly on the upside in the last 4 quarters. $$$MR. MARKET$$$ believes that PeopleSupport will end up with FY 2006 revenues of $112 MM and then the big year, 2007, will be $189 MM. The incremental $44 MM revenue over and above the ANAL-ysts projected $145 MM will generate (36% x 44 MM) $16 MM in earnings, or an incremental $0.85/share over and above the ANAL-yst $0.76/share projection. This means that PSPT should earn $1.61/share in 2007. If you take the existing PE multiple of 19 and multiply it by these earnings, you end up with a share price of $30.59, which is past my sell target.
The CEO, Lance Rosenzweig is also optimistic:
“Our excellent performance is also a result of our continued progress in expanding our revenue stream across a portfolio of services and geographies. We perform over 100 processes and manage over 4.5 million customer communications per month for our clients. PeopleSupport is executing on its strategy to become a diversified high performance outsourcer for the global enterprise."
Next time you make a phone call, ask who you are speaking with…and “How about those Bears?”
If you like this write up, tell me about it, and email it on to your friends. If you really like this write up, and end up making money on this stock pick, please think about donating $1.00 (yes one dollar) to the football playing boys of PHS. You can do it in 30 seconds at http://www.golittletigers.com
I am HUGE!
$$$MR. MARKET$$$
I have been in on this stock since $9.15 It was one of my long term picks. Happy to see it here.
Comment