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Friday, September 5, 1997
TeleTech Holdings Inc.
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Phone: 303-894-4000
Website:
http://www.teletech.com
Price (9/4/97): $16 7/8
HOW DID IT FIND TROUBLE?
As readers familiar with the Fool Portfolio's ill-timed purchase of ATC
COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATCT)") else Response.Write("(Nasdaq: ATCT)") end if %> know, companies in the once red-hot
teleservices business have been calling for help over the last nine months.
TeleTech Holdings has been no exception, dropping from a September high of
$40 3/8 to a recent low of $14 1/2.
What happened? Investors enthused over news of a two-year, $60 million deal
with the U.S. Postal Service pushed the shares up 33% last fall. That was
after the stock had doubled in the six weeks following its initial offering
at $14 1/2 on July 31, 1996. With the PE ratio in the stratosphere, the stock
started to correction. A secondary offering in October that allowed CEO Kenneth
Tuchman to unload 2.2 million shares didn't help matters.
TeleTech shares did get a boost in November from a favorable article in
Investors's Business Daily. Sales continued climbing, too, despite
problems at CompuServe, one of its largest customers. But the last few quarters
have left investors unsatisfied, despite 120% sales growth and a 217% increase
in EPS to $0.19 in the first six months of '97
The recent strike at UPS, another of TeleTech's largest customers, delivered
the final whammy. An August 11 downgrade to "neutral" from "strong buy" from
Morgan Stanley dropped the stock 20% to $15.
BUSINESS DESCRIPTION
Denver-based TeleTech Holdings is part of the outsourcing wave, providing
telephone- and Internet-based customer support services for a select group
of Fortune 500 companies that would rather devote their resources to their
core competencies. Most of its business comes from firms involved in
telecommunications, technology, or transportation (15%, 33%, and 28% of FY96
revenue, respectively).
Inbound calls account for 98% of sales, meaning these guys are not making
those annoying cold calls. The company's 6,550 representatives offer 24-hour
technical and help-desk support, process product information requests and
purchase orders, handle billing questions, and resolve customer complaints
using sophisticated workstations packed with helpful software.
Nearly all of TeleTech's business comes from multi-year contracts, with payment
based largely on the amount of time spent answering customer questions. Last
year, UPS, AT&T, and CompuServe accounted for 28%, 27% and 14%, respectively,
of the firm's revenue. The CompuServe contract is gone, but large contracts
with the U.S. Postal Service and GTE have more than made up for the lost
business. Other customers include Apple Computer, Bell Atlantic, and Novell.
The company operates 16 call centers in the United States, Australia, New
Zealand, the United Kingdom and Mexico.
Aside from its clients' own in-house customer service operations, competitors
include Access Health, APAC Teleservices, Electronic Data Systems, MATRIXX
Marketing, Precision Response, SITEL, and Sykes Enterprises. For more on
the troubled sector, see the Fool on the Hill column from last
November
14.
FINANCIAL FACTS
Income Statement
12-month sales: $233.2 million
12-month income: $22 million
12-month EPS: $0.37
Profit Margin: 9.4%
Market Cap: $1005.4 million
Balance Sheet
Cash & Securities: $71.3 million
Current Assets: $112.7 million
Current Liabilities: $30 million
Long-term Debt: $9.2 million
Ratios
Price-to-earnings: 45.6
Price-to -sales: 4.3
HOW COULD YOU HAVE SEEN IT COMING?
Last September, an investor might have noted TeleTech's nice history
of growth and the widespread enthusiasm for most of the teleservices stocks,
which gave investors a nice way to play the outsourcing trend. Unfortunately,
at $40 a share, TeleTech's stock was trading at 400 times trailing earnings.
No matter how you slice it, that's pricey.
Weakness in the sector as growth failed to meet investor expectations was
bound to contribute a dose of reality to the company's lofty PE multiple.
Plus, trouble at UPS would mean trouble at TeleTech.
WHERE TO FROM HERE?
Second quarter results announced July 17 showed revenue up 88% to $65 million
and EPS jumping an equally impressive 150% to $0.10. About 60% of the additional
revenue came from new customers. Operating margins rose to 14.9% from 10.3%
last year, helped by increased capacity utilization, a larger revenue base
to absorb fixed costs, and a trend toward managing its clients' facilities
rather than fully outsourcing the customer service operations. Add the new
five-year deal with GTE, and you're looking at a strong business.
First Call consensus EPS estimates now stand at $0.44 for FY97 and $0.68
for FY98, with analysts projecting 40% annual growth for the company, far
above the 15% rate for the industry. With growth over the next six quarters
running around 50%, we get a PEG of 0.89. That's not great, but it's not
bad for a legitimate growth stock. With the YPEG fair value at $27 based
on FY98 estimates, TeleTech appears poised to retrace much of its recent
trouble in the next 12 to 18 months if it meets estimates.
- RgeSeymour,
[email protected]
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