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Morningstar: EDS, CSC, Accenture Are Best IT Services Investments

But don't sink your dollars into ACS, BearingPoint, or Perot Systems, the firm warns in a report released Friday.

Thinking about investing in the IT services industry? Financial analysis firm Morningstar says consider CSC, Accenture, or EDS. But don't sink your dollars into ACS, BearingPoint, or Perot Systems, the firm warns in a report released Friday.

Morningstar likes Accenture because it's been aggressively building out operations in India, where skilled programmers cost about one-third of the going rate in the U.S. Accenture "was far ahead of the competition" in building up offshore resources, says Morningstar analyst Mike Ford-Taggart. Accenture has about 19,000 Indian employees. Its share price is up about 20% in the past six months. It currently trades with a trailing twelve month price/equity ratio of 22.01.

Morningstar says Computer Sciences Corp. is worth a close look because its strong presence in sensitive federal government and defense markets shields it from low-priced offshore competitors who aren't eligible for much of the work CSC performs. "The board has also authorized a massive share buyback program," says Ford-Taggart. CSC's share price is down about 9% in the past six months. P/E ratio is 21.87.

As for EDS, Morningstar says the problems that plagued the company in the early part of the decade -- including delays in its massive outsourcing contract with the Navy and Marine Corp., and management turnover -- are largely behind it. Morningstar also likes the fact that EDS has purchased a majority stake in Indian BPO provider Mphasis. "A share buyback plan is also in place," notes Ford-Taggart. EDS's share price is up about 6% in the past six months, and P/E ratio is 39.62.

Morningstar cautions that the IT services industry isn't without its dogs, at least from an investment point of view. Failure to file timely financial reports and questions about stock options probes make BearingPoint and ACS, respectively, risky investments, says Morningstar. And Perot Systems is frequently troubled by underperforming contracts. "The firm seemingly cannot hit on all cylinders at once," says Ford-Taggart.

Morningstar's report did not include IBM, the world's largest IT services provider, as the study was limited to pure play vendors. It also did not include offshore providers.

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