Capgemini SE (CGEMY, $23.18): “A Gem in The Rough”
By:
Edward Eisenhauer, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Capgemini SE (OTC: CGEMY) is a pure play IT services vendor that
provides consulting, technology, professional, and outsourcing services.
• CGEMY’s Q4 earnings
results were impressive given the performance of domestic and global markets
during Q4 2018. They had a 9% increase in bookings, 37% revenue increase in
consulting services, 7.8% revenue increase in Digital Projects, and 4.2% growth
rate in Europe.
• CGEMY reiterates its
struggle retaining and attracting enough talent to continue efficient
operations. In 2018, CGEMY had an attrition rate of 20%.
• The lagging Brexit
decision has sidelined CGEMY and its services for the time being, however,
CGEMY is well positional to capitalize on market wide digital restructuring
soon to come, whether Brexit happens or not.
Key
Points:
CGEMY released strong Q4 earnings showing their
resilience during macroeconomic uncertainty and market volatility. This
supports CGEMY’s growth opportunities surrounding Brexit and its outcome. After
Brexit comes to a close, CGEMY is predicting a large increase in their consulting
and cloud services as firms across all industries look to integrate advanced
cloud-computing and cybersecurity, and have a clearer vision of future business
activities.
CGEMY has emphasized its
need to lower its attrition rate, currently at 20.8%, and plans on increasing
investment in order to do so. Management predicts the fight for talent to
continue into 2019.
CGEMY’s operating margin,
currently 10.9%, will continue to grow to 12% based on strong growth in the
consulting segment, digital products gaining scale, and a robust emerging
product pipeline. Consulting revenues grew by 20% and are predicted to increase
in 2019. The digital products segment grew by 7.8% in 2018 and is expected to
increase to double digits behind their large growing product portfolio. Due to
Brexit and the rapid growth in global digital transformation, CGEMY sported an
organic growth rate of 8.7%, in line with estimates.
What
has the stock done lately?
Capgemini was pitched on
November 9, 2018 and has since closely followed global markets, declining
aggressively in December 2018. Again, similar to the major indices, CGEMY has
mostly recovered from the December sell-off. It is currently priced at $23.17
as of February 15, 2019, slightly lower than our $24.18 purchase price. The
stock has not underperformed or outperformed the market and has been simply
moving along with market noise.
Past
Year Performance:
CGEMY has increased 11.4% YoY and is
about halfway within its 52 week low and high of $18.18 and $27.75. After a
strong earnings release, CGEMY rose 3.06% on February 14, 2019.
Source:
FactSet
My
Takeaway:
Despite weak stock
performance over the last 3 months since purchase, Capgemini has maintained
strong growth drivers that will propel it to its target price of $30.93. As
mentioned, CGEMY’s two largest segments, consulting services and digital
products, continue to grow at an increasing pace adding to an increasing
operating and net income margin. Capgemini is known to be in the “IT Sweet Spot”
because of the global need for business digitalization to stay competitive no
matter what sector. The IT services sector’s total addressable market is
expected to grow to a $2.4tn market in 2025 and CGEMY is one of the top players
and an innovation leader. Capgemini has a powerful product portfolio and client
portfolio that it will continue to leverage around the world.
Source:
FactSet
