Business & Professional
Services
INITIATION
Neutral on Customer Care
We initiated coverage of three companies in the customer care sector:
Convergys Corporation (CVG, $6.73, Neutral, target $9), Sykes Enterprises
(SYKE, $16.72, Neutral, target $21), and Teletech (TTEC, $7.08, Neutral, target
$9). These companies primarily provide outsourced customer care (call center)
services and tend to have large client concentrations. For example, when you
call a credit card company often times you will be speaking with someone from
one of these companies. We believe that solid, long-term industry fundamentals
for the customer care space given secular growth trends, stable pricing,
balanced capacity expansion plans, and the continued migration of U.S.-based
call center capacity offshore are balanced by the weak macro environment and
underwhelming risk/reward of +23/-6%.
■
In the context of a weak macro environment and downside earnings risk to
consensus, risk/reward of +23/-6% not enough for positive sector view.
• Even though we have assumed a relatively severe recession in 2009,
which matches Credit Suisse economists’ view, we see downside risks
to consensus estimates and potentially ours if the impact from the
recession is even more severe.
• Typically, we look to select stocks exposed to preferred themes and at
trough valuations, but given the current uncertainty, we are neutral.
■
Likely to recommend Convergys when there is more visibility on cash flow.
• CVG 2009 consensus looks high; additional impairment and potential
restructuring could create volatility on Q4 earnings due 1/27. Several
headwinds—2009E consensus looks high, additional impairment, and
potential restructuring could create a buying opportunity, although we
would wait to build positions until we have more visibility that
Convergys can deliver its targeted 2009 free cash flow, which should
benefit from achieving its first quarter “go live” milestone in HR. This is
one of the key variables that will determine if CVG can reach its goal of
approximately $200 million of free cash flow in 2009.
• Less end market/client concentration. We model a global slowdown
and believe certain end markets are more at risk than others. We also
favor companies with less end market/client concentration: CVG and
SYKE stack up best.
■
TTEC, CVG below trough valuations—we use price-to-peak-earnings
multiples to compare valuations with historicals. TeleTech is furthest below
trough valuation and Sykes is furthest above; price targets are DCF-based.
■
What would make us even more positive or negative? We’re on watch for:
• positive/negative inflection points in economy, changes in currency;
• stocks in the sector that approach trough valuation levels.

Table of Contents
Sector/Stock Thesis Summary......................................................................................... 3
Neutral Due to Cyclical Concerns................................................................................. 3
Market Opportunity............................................................................................................ 7
Our Cyclical Thesis ......................................................................................................... 10
Index Declined 68% this Cycle Before Bouncing 38% off Bottom .............................. 10
Trading History Adds Conviction to Our Cautious Call ............................................... 10
Valuation.......................................................................................................................... 12
Company Sections
Convergys—Execution Concerns Offset Positive Catalysts...................................... 13
Sykes—Valuation Overshadows Notable Client, End Market Diversification............. 27
TeleTech—On Track, But Cyclical Fears Keep Us Cautious..................................... 39
Valuation Table ................................................................................................................ 51