Saturday, February 23, 2019

A Current AIM International Equity Holding: Capgemini SE (CGEMY, $23.18): “A Gem in the Rough” By: Edward Eisenhauer, AIM Student at Marquette University

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.


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