Convergys Sees Stock Slip Despite Strong Earnings Report

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Convergys Corp., Cincinnati, last month posted strong second-quarter earnings results and appeared to be continuing an impressive growth streak, but investors sent the company's share price tumbling.


Analysts said the company's posting of results that did not exceed their expectations might have been a signal for investors who had been aggressive to sell their shares in the company.


Convergys' stock slid 16 percent July 27, the day it released its earnings, closing at $43.75 and down from an opening price of $52.56. However, the price was more than double what it was a year ago. It started to recover in the days following its earnings announcement.


The volume of shares traded during the day was 3.7 million, compared to its average trading volume of less than 1 million shares per day. The company -- which provides outsourced call center, customer relationship management and billing services for direct marketers and other companies in several countries -- could not explain the heavy trading volume.


"I think it's a matter of being a victim of doing what you said you were going to do and not exceeding that," said Renea Morris, spokeswoman at Convergys.


Convergys' profits were $45.5 million, or 29 cents per share, up 31 percent from the second quarter a year ago. Revenues increased 22 percent, to $521.9 million, compared to $426.2 million during the same quarter last year.


Following the earnings announcement, Carla Cooper, an analyst at Robert W. Baird & Co., Milwaukee, lowered her rating on Convergys' stock from strong buy, the investment firm's highest ranking, to market outperform, its second-highest rating.


"It was really a solid quarter," Cooper said. "It came in essentially in line with what I was looking for, but my feeling is that the valuation on the stock is higher than a lot of the companies in either the billing space or the customer support space. I couldn't see arguing for a higher valuation given that the company didn't overachieve in the quarter."


She said her firm usually reserves its strong buy rating for companies that analysts firmly believe will achieve 25 percent gains in stock price during the next 12 months. She wasn't certain Convergys will be able to maintain its torrid growth pace during that span. Her rating could be upgraded if new contracts or other favorable news is announced.


Michael Turits, an analyst at Prudential Securities, New York, also downgraded the stock from strong buy to accumulate. However, he declined to comment.


James Kissane at Bear Stearns, New York, attributed the stock decline primarily to Prudential's downgrade, but also said Convergys' stock might have suffered from Nokia having announced disappointing earnings. Much of Convergys' business comes from providing services for wireless phone companies.


Morris said Nokia's announcement would not affect Convergys' business.


On the day Convergys posted its second-quarter earnings, it announced a new contract to provide billing and customer care systems for Verizon Wireless.


During the second quarter Convergys signed a three-year contract to provide OmniSky Corp. with Internet billing and customer contact solutions in addition to customer contact center services. Convergys also renewed a billing contract with AT&T Business Services for three years at a value of approximately $100 million.


Portfolio value: If $1,000 had been invested in each of the 100 companies in the DM News Portfolio at the beginning of the year -- for newly public companies when the stock first closed -- the value would be $90,570, a year-to-date decline of approximately 9.43 percent.
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