In the July 2010 issue of the Investor Advisory Service we recommended Syntel, Inc., a U.S. headquartered company that provides IT and business outsourcing services to businesses around the world. This small-to-midsized company had revenues in 2009 of $419 million, and had grown earnings per share at an annualized rate of 20.4% since 2001.
Despite the recent economic downturn at the time of the July 2010 issue of IAS, Syntel had been performing quite well, considering that 75% of revenue comes from the financial services, banking, and insurance industries. Major customers include American Express and State Street.
When the July 2010 went to press, Syntel was trading at a share price of $34.75, and we recommended it as a buy below $40.
In the September 2010 issue, we reported that Syntel had increased sales 31%, with brisk growth coming from its smaller clients. Higher wages and lower, renegotiated fees from a joint venture held back earnings per share, though. Still, the company hired 1200 new employees during the second quarter. SYNT's stock was selling at $40.75.
For the third quarter, Syntel's profitability was impacted by lower margin work and the effect of the lower fee structure. Sales grew 34%, but earnings were flat year-over-year. The share price at the time of the December 2010 IAS was $47.34.
For the fourth quarter, the company again saw increasing sales and declining EPS, and the company cited wage pressure, higher taxes, and negative currency effects. Still, the company added staff and offered guidance for 2011 indicating EPS growth of 2% on sales growth of 16%, but our analysts noted the possibility that this figure could be conservative if demand continues to ramp up. The share price reported in the April 2011 issue was $48.60.
In our June 2011 issue, Syntel reported more of the same in the first quarter of the year: sales growth of 25% and flat earnings. Management claims the increased costs that are holding back profit growth simply represent the investment necessary to build the base for the next stage of growth. Our analysts wrote, "We look forward to the day when all this base-building starts to pay off, but we will need to see real progress soon if we are to stick with this name." The market apparently shares a positive view of the upside potential of the company, as the share price of the stock had reached $54.48 by the time of publication.
When the July 2011 issue of the Investor Advisory Service went to press, Syntel's stock was selling at $51.74 per share. This represents a significant gain of 48.9% since the original recommendation one year earlier, compared to a return of about 16.1% for the S&P 500 Index. Our calculated maximum buy price is currently $46, meaning that the stock is out of range at the current price, notwithstanding the words of caution expressed in the June 2010 issue.
Our analysts are watching SYNT closely to see if it can progress to the next stage of growth in the company's life cycle, but the performance over the last year has been impressive nonetheless.
Disclaimer: Syntel was selected for review in part because of its performance over the past year. Its outperformance relative to the broader market is not necessarily indicative of performance of the broader Investor Advisory Service.