This is due in part to differences in product mix, but primarily to differences in cost structure; Cognizant employs American consultants but outsources other functions to cheaper laborers in India, while Computer Sciences Corporation (NYSE:CSC) relies primarily on workers located in the same geography as its customers. As a result, it does not earn as much per dollar invested in the business.
A comparison company
Computer Sciences is a decent business in the late stages of a turnaround that trades for just 7.5 times earnings. A good comparison company is Infosys (NYSE:INFY), which trades at 13.5 times earnings.
Infosys is an example of a company that earns high and stable margins even during recessions. The company’s offering is quite different than Computer Sciences Corporation (NYSE:CSC)’s, but it is important for investors to compare investment opportunities across situations.
Infosys has an extensive customer network and generates lots of free cash flow. This is largely due to its capital-light structure, which allows it to grow without significant additional investment. In addition, earnings per share have tripled over the last decade, which demonstrates the company’s ability to grow.
As one of the largest IT service providers, Infosys enjoys the benefits of superior scale and an unmatched product offering. This gives the company the semblance of a moat, which allows it to earn outsized profits. In other words, Infosys has a durable competitive advantage, while Computer Sciences does not.
Infosys translates its competitive advantage into outsized profits. Like Cognizant, Infosys earns much higher returns on capital than Computer Sciences. This is because Infosys not only outsources work overseas, but it also dominates service offerings for financial services, manufacturing, and retail customers. The company’s dominance of its primary markets puts it on much firmer footing than Computer Sciences.
Bottom line
Investors have the choice between investing in the tail end of a turnaround at 7.5 times earnings or investing in a much better business with a long history of profitability at 13.5 times earnings. Both companies offer about the same risk/reward proposition, which makes the investment decision come down to one thing: style. Deep value investors should go for Computer Sciences Corporation (NYSE:CSC), while investors looking for good businesses should go with Infosys.
Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Deep Value Investors Will Love This Stock originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
