PeopleSupport Inc. (PSPT): Return of the Living Dead

From The Stock Masters

Outsourcing, offshoring – these are not popular words with many Americans.   Its been happening for years and no matter how you slice it, it hurts when it happens to you.  It’s the reason I quit the programming business, just like in trading stocks, it pays to be ahead of the game before the inevitable occurs.  But I’m not writing this article to make a political or ethical standpoint, I’m writing it to inform you about PeopleSupport Inc. (NASDAQ: PSPT).

Cry-babying aside, outsourcing is going to keep happening, so it’s time for us to make some money off of the companies raking in the cash.  PeopleSupport is a Business Process Outsourcing (BPO) provider – they reduce costs, improve performance and increase revenues for their customers with the majority of their services being performed in the Philippines. They brought in $62M in revenue for 2005 and $110M in 2006.  PSPT is making a nice little profit, $22.8M in net income for 2005 and $14M.  Their stock is trading near its 52-week low at under $12 a share and just fell from the $20’s a few weeks ago.   

On March 9th PeopleSupport shares fell 38% on reported a lower fourth-quarter profit and a Q1 forecast that was below Wall Street’s expectations.

Their fourth-quarter profits of $4.2M meant nothing to investors, which came to an EPS of $0.18 but far from their $0.65 they posted during the prior year period. It was a massive sell-off and gradually declined during the final 2 hours of trade, to close down by $8.83 at $13.65 on the highest volume of the year. PSPT hit a new 7 month low and it’s been clawing back from the dead ever since.

Just last week American Technology Research reiterated their "buy" rating on PeopleSupport but reduced their target price from $30 to $20 a share. Shares of PSPT have been trading around $12 to $11 a share, so there is room for movement here. Last Monday Friedman Billings Ramsey analyst Matthew J. McCormack said: "The sell-off on concerns related to a lost contract with Vonage Holdings Corp. (VG) may open the door to an activist shareholder or even prompt a bid for the entire company. The shares are likely a good entry point for a trade" but also warned the stock will be volatile until management quantifies the Vonage loss.

So what’s to think here America, damaged goods or is this a prime candidate for a comeback story?

One thing I’d like to see happen before I get behind PeopleSupport is to see management start buying some shares to show investors their stock is trading at a discount. Directors Jose A. Rose and Frank Penra Jr. picked up a combined 3,000 shares on March 12th but that’s about it for the insider transactions. So for me to start believing we’ve found a diamond in the rough, I want to see some of the main players throw down some cash. PeopleSupport’s management knows best what the future will hold, so let’s see if they are willing to walk the talk. PeopleSupport three largest clients, EarthLink (ELNK), Expedia (EXPE) and Washington Mutual (WM), accounted for 43% of their revenues last year which means it’s time to find new business. Besides finding business, PSPT has risks they are forced to deal with since they primarily work abroad with the foreign governments of Philippines and Costa Rica. They did not become profitable until 2003 and incurred significant losses in each of the five fiscal years through 2002. PeopleSupport has accumulated a deficit of $16.1M as of December 31, 2006. Keep in mind losing Vonage (VG) means PeopleSupport will be searching for $14M in revenue that has been buried alive and now – dead in the ground.

Don’t get me wrong, there is tremendous opportunity for growth in this company and if the analysts are saying it can get to $20, people tend to listen and follow the crowd like undead drones. For now PSPT is damaged goods, and if you read their Annual 10-K that made shares drop 38% this month, it’s hard to feel good about investing in PSPT. I would encourage you to investigate this company, it’s has huge potential. If you’re willing to throw down some gambling money, PSPT is a better bet than losing it all at the blackjack table. Besides, if the Living Dead can return to life, so can PeopleSupport, they’ll just offshore the zombies from other countries to field the call centers.

Article written by: Frank Lara Jr.
Article posted on: March 29th, 2007

Disclaimer: The Author does not own any shares or hold any short/long positions in the securities mentioned in this publication. Kudos to Paul and his email that lead me to investigate PeopleSupport.

http://www.thestockmasters.com/index.asp