Year 2013 has just begun. However a few large cap stocks have aleady made it a good year for the their shareholders. In this article, I have discussed three large cap stocks which have shown excellent run up since the beginning of 2013. These stocks are Infosys (NYSE:INFY), Dell (NASDAQ:DELL) and Transocean (NYSE:RIG).
|Name of Company||YTD price increase|
The run up in Infosys was because of the positive quarterly results and ramp-up in deals, Dell is possibly up for a buyout and Transocean had a new investor and it also settled Macando case at lower than expected penalty. Now let’s discuss these stocks in detail:
Infosys Ltd ADR (NYSE:INFY)
After some disappointing quarters, the recently declared 3Q13's result is the first sign of Infosys’ strategic initiatives of organizational realignment paying off. The company's revenue was up by ~5.8% on year-over-year basis. The growth was mainly driven by the Consulting & Systems Integration segment which was up by ~15%. This segment was benefited by the Switzerland based Loadstone which was acquired by the company in fall of October, 2012 and was responsible for ~7% of this segment's growth. Loadstone advises international companies on strategy and process optimization and also provides business transformation solutions based on SAP. The deal helped Infosys to expand its Consulting & SI segment. Infosys added 89 clients during the quarter out of which 36 were from Lodestone alone.
The growth was also aided by some of the new deals entered into by the company. Infosys signed eight new outsourcing deals with Total Contract Value (TCV) of ~$731 million. Four of these were from US, three from Europe and one from India. Along with that it entered into 14 contracts through its Products and Platforms business with a TCV of ~$100 million. The company had ~20 transformational deals over the last three quarters and will witness ramp-ups over the next 2-3 quarters. I expect that the company will maintain the performance and the momentum in FY14 as well.
I also believe that these deals lead to the first phase of revenue recovery for Infosys. The second phase will be led by a strong recovery from the top 50 customers where the company’s revenue increase has been low. Infosys seems well-aware of this issue and is now creating a client engagement model with dedicated client partners for these customers. This model has worked well for the companies like Accenture and Cognizant and if Infosys is able to replicate it then this should put the company back on track to gain a significant market share.
Dell Inc. (NASDAQ:DELL)
Earlier last week, the news about an imminent buyout by Dell resulted in a ~13% increase in its stock price in just one day. Dell is considering a leveraged buyout (LBO) for the company and is talking with two private equity firms namely Silver Lake and TPG capital.
In my opinion the timing may just be right for an LBO. According to the latest Gartner's preliminary C4Q12 PC market report, Dell has again lost some of the market share and its PC business is also struggling. Its PC shipment is flat quarter-over-quarter and has declined by ~21% year-over-year. I believe it will be better for the company to restructure the PC business when it is private rather than public.
As far as the financial feasibility goes, I think there are some hurdles in the LBO, but on papers it is possible. I assume that for a LBO Dell will repatriate its offshore cash and will finance the deal with debt. I feel that the interest expense from the deal will be ~$820 million and the company's cash return will be ~$860 million thereby covering the interest exposure. Although as a result of this Dell won't be able to make any major acquisitions in the near future.
In addition to this, I feel that the weak PC segment is going to drag the stock price furthermore in the near future so I expect that the share price for the buyout of ~$16 at around 20% premium from the current market price is a good reason to buy the stock right now.