Be sure to check out our detailed stock analysis (click here). The global market for IT services is large and only getting larger. IDC estimates that the total market was over $855 billion in 2011, and expects it to expand at a compound annual growth rate of 4.6% to 2018. The beauty is that it tends to be high-margin, and the services provided are in high demand -- helping its customers lower IT costs.
My favorite pick
This stock is up over 100% during the last twelve months, compared to the S&P 500's 25%, but it could move higher. The company remains one of the largest IT service firms worldwide, specifically being a leading IT service contractor for the U.S. federal government -- Computer Sciences Corporation (NYSE: CSC) is one to watch.
It is engaged in the IT and professional services industry, with clients including both governments and commercial enterprises, which rely upon the use of information services and associated systems for the conduct of their operations. Computer Sciences' operations include IT and business process outsourcing, and emerging services, such as cloud computing and cyber-security protection.
Sequestration has placed some overhang on the stock, where its North American Public Sector business got almost 70% of its revenue from the Department of Defense during its first quarter.
To help with any revenue declines related to budget cuts, Computer Sciences is focusing on cost reduction. Through the first quarter the company saw $400 million in cost savings and expects to save over $600 million for fiscal 2013. Worth noting is that Computer Sciences also pays a 1.7% dividend yield.
Infosys (NYSE: INFY) is the India-based global IT services company offering end-to-end business solutions, including consulting, design, development, maintenance and systems integration.
Infosys' operating margins have been declining for the last three years and may well continue over the interim. Some of its key contracts have been at low prices, which should continue to strain margins. In it's recent quarterly results management was not overly optimistic about the company's interim performance, due to poor expected discretionary consulting service demand.
IBM (NYSE: IBM), aka "Big Blue," generated nearly $40 billion in 2012 (40% of total revenue) from its global tech services segment, which includes IBM's outsourcing, integrated technology services, business transformation outsourcing and maintenance services. The thing about IBM is that its revenue model is more diverse. The tech giant also sells software and hardware.
Unlike its smaller IT peers, IBM is expected to see 2013 revenues up 0.5% in 2013 and 2.5% in 2014. At this stage IBM is much more of a cash generator than a growth story. The company had some $12 billion in cash at the end of the first quarter, generating $2.4 billion in cash flow from operations and free cash flow of $1.7 billion.
Cognizant Technologies (NASDAQ: CTSH) is a US-based consulting firm that's holding its own versus its India-based peers. The company uses an onsite-offshore business model. It has over 75% of its workforce located offshore, but has a solid presence in the North American consulting market.
Cognizant is a big benefactor of offshore outsourcing, where companies are continuing to look for cost saving opportunities. Cognizant is also hoping to tap the broader geographic markets, including tapping the outsourcing markets in Europe, Asia Pacific, Latin America and the Middle East.
The barriers to entry in the IT services sector is high, needing large amounts of infrastructure. The consulting industry also tends to afford its companies with impressive margins. Overall, the industry should see impressive tailwinds as IT budgets get boosted on the back of a rebounding economy. As far as the industry's best bet, Computer Sciences also trades the cheapest on a price to earnings basis:
All in all, Computer Sciences appears to be a great value play, but investors could also find value in the high-growth story of Cognizant, where analysts expect the company to grow EPS at annualized 18% over the next five years.