Valuation: Sykes Enterprises (SYKE)

Company Profile:  Sykes Enterprises (SYKE) (obtained via Yahoo Finance)

Sykes Enterprises, Incorporated provides outsourced customer contact management solutions and services in the business process outsourcing arena. Its solutions include customer assistance, healthcare and roadside assistance, technical support, and product sales. The company also provides various enterprise support services comprising technical staffing and outsourced corporate help desk services, as well as offers fulfillment services, including multilingual sales order processing through the Internet and phone, inventory control, product delivery, and product returns handling. Sykes Enterprises provides its services to medium sized businesses and public institutions primarily in the communications, technology/consumer, financial services, healthcare, transportation, and leisure industries. It operates in the United States, Canada, Europe, Latin America, Asia, and Africa. The company was founded in 1977 and is headquartered in Tampa, Florida.

Business and Management Review

1) Is the business simple and understandable?

The business in which this company is in can be easily understood by any investor. As mention above, they service some of the variable cost of many companies by outsourcing their labor and creating a more cost feasible business environment for their clients. On the other hand, Sykes Enterprise has strong fundamentals by having:

– 59.6% growth in Operating Income from the past 3 years.

– 23.7% revenue growth from last year second quarter to this year’s same quarter.

– An improvement of its quick ratio to 2.88 being also higher than its industry benchmark.

– An increase of 7.2% of the company’s CFO (Cash Flow from Operations) from last year.

– The operating margin has been on the rise from 2.3% in 2003 to being 8.3% this year, which subsequently drives ROE up and give us an understanding of how much dollars of revenues are left in the company from recurring activities after the service is provided.

These factors and the actual high demand for human outsourcing around the world create Sykes Enterprises a company to consider for the future.

2) Does the business have a consistent operating history?

This stock is in the development tools industry, which has proven to be an excellent industry over the past 10 years, but hasn’t been so strong the past five. Most stocks in the development tools industry have seen steadily growing revenue and earnings over the past three years. This stock has also seen steady revenue growth over the past three years, with its results over the past year being particularly impressive. In contrast to its peers, this stock’s earnings per share have grown at a very high rate over the past three years.

Moreover, note that this stock’s sustainable growth rate is quite a bit less than the rate at which its earnings per share have grown. That means Sykes Enterprises will probably have to raise additional capital from outside sources at some point if it continues to grow at its current rate.

3) Does the business have favorable long term prospects?

This stock’s forward earnings yield of 7.69% is the annual return it would generate if its profits remained fixed and it paid out all of its earnings as dividends. Not only is this much higher than the earnings yields of other stocks in its industry, it is also healthy in absolute terms. In addition, Analyst expectations for this stock’s earnings have been fairly stable.

Furthermore, most companies in the development tools industry have generated very low returns on assets over the past five years. This company, however, has posted results that are some of its industry’s best. Note that the company’s net profit margins and operating margin, as mention above, have been average compared with other companies in its industry.

4) Is management rational?

Management has done a great job managing the books and operations of this company. By not paying dividends on their shares, they have focus on reinvesting the funds that come into the company to create more growth so that in the long haul will benefit investors. Additionally, by creating a comfortable financial health environment within the company by having good financial leverage, quick, cash and current ratios; they have also pay attention at their operating margin and ROE which are two key profitability ratios that will play a big role in determining the value of the stock.

5) Is management candid with its shareholders?

This company is adequately treating their investors by creating an investor relation’s website with many features for them to stay on top of their portion of Sykes’ shares.

Financial and Value Review

Defensive:

1) Size of firm

SYKE is a small-cap stock ($ 2 billion or less) “Fail”

2) Strong financial condition

The company’s current ratio is about 3.23, above the 2.0 requirement.  “Pass”

3) Earnings stability

This company has not had a consistently positive net income for over 10 years.  “Fail”

4) Dividend record

Sykes Enterprises has not consistently paid a dividend for over 10 years.  “Fail”

5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years.  “Pass”

6) Price to earnings analysis

The PE ratio has met the requirement of being under 20.  “Pass”

7) Price to assets analysis

Following our Methods, the Price to Book ratio and the PB/PE tests are both met. “Pass”

Overall

Having passed 4 of the 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we believe Sykes Enterprises may not be suitable for the defensive investor.

Enterprising:

1) Strong financial condition

The company’s current ratio is above 1.5 and debt to net current assets is lower than 1.1.  “Pass”

2) Earnings stability

SYKE has reached a positive net income for over 5 years.  “Pass”

3) Dividend record

This company does not currently pay dividends.  “Fail”

4) Earnings growth

Earnings are greater today than they were 5 years ago.  “Pass”

5) Price

The current stock price is more than 150% of the net tangible assets.  “Fail”

Overall

Since Sykes Enterprises passed 3 of the 5 enterprising tests, we do not consider this company to be good for enterprise investors.

Valuation:

Our valuation model finds a fair value to be around $19.72.

Opinion:

Since the company is currently trading at about $19.49, we feel it is currently a bit undervalued and may not be a suitable investment for the defensive or enterprising investor. None of the staff of ModernGraham.com held a position in Sykes Enterprises at the time of publication.  Also, please read our disclaimer and Our Methods.


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