Sunday, November 24, 2019

A Current AIM International Equity Holding: Capgemini (CGEMY, $23.08): “Capitalizing on the Exponential Growth of Innovation”


Capgemini (CGEMY, $23.08): “Capitalizing on the Exponential Growth of Innovation”
By Alex Malitas, 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 (CGEMY) provides consulting and technological strategy services to global clients in order to aid them in their individual competitive industries.

• Three operating segments: Applications and Technology (70% of Revenue), Operations & Engineering (23% of revenue), and Strategy & Transformation (7% of revenue).

• The company revised revenue growth projections for fiscal year 2019 to the lower end of the previously stated range to an estimated 5.5% growth.

• The company has commenced a friendly tender offer to acquire Altran Technologies which could be a major catalyst for the future.

• After beginning 2019 at a 52-week low, the stock has rebounded and has the potential to continue rising.

Key points: 

Capgemini’s position as a leader in global technology consulting has yet to be challenged while it focuses on seven strategic priorities to address the future of technological innovation.

The company is in a unique spot to capitalize on future development of Internet of Things and 5G technologies as many firms examine how to implement these technologies into their products and services as well as internal mechanisms. Capgemini’s ability to provide highly efficient services through their in-house consultants will continue to allow the firm to develop relations with clients who wish to build out platforms for Artificial Intelligence, deep learning, and cyber security.

In June of 2019, Capgemini announced a public tender offer for Altran, a global leader in engineering and R&D services. The combined company would create what the company describes as an “intelligent industry” which connects information technology with operational technology. The combined firm would be result in a 17-billion-euro revenue firm with 250,000 professionals employed. Utilizing expertise in future technology such as AI, 5G, and IoT, the combined firm would have access to a variety of new clients with high synergies and operating model efficiencies.

This is not the first time Capgemini has used M&A. In fiscal year 2018, the company invested heavily or acquired in five companies to expand their client base. The synergies that were experienced with these previous acquisitions show managements ability to effectively execute on M&A transactions which is likely to be seen in the case of the Altran acquisition. If the merger closes, shareholders are likely to see revenue growth and higher value of Capgemini’s stock.

What has the stock done lately?

Since reaching a high of $27.67 in mid 2018, Capgemini’s stock performance has been trading in a range of $18.86 and $25.81. The company had a major drop in stock price at the beginning of 2019 reaching the low of $18.86. Recently, the stock has consolidated in the $22 - $24 range however the positive catalyst of the Altran acquisition could provide additional value to shareholders. The company’s current stock price is $23.19.

Past Year Performance:

Over the past year the stock has returned a -4.38% coming in at $23.19 which is a discount to when the stock was originally added into the AIM portfolio at a price of $24.18 in November of 2018. However, the year to date change, shows drastic improvement in stock price increasing by 16.85%.

1 Year Stock Chart vs. Benchmark from FactSet
Source: FactSet
My Takeaway

Capgemini’s position as a leader in IT consulting in an environment where technology is outpacing many large firms gives them an advantage for continued revenue streams. The proposed combined company of Capgemini and Altran represents a positive outcome for Capgemini shareholders as the addressable market of their consulting services expands with expertise in new industries. With access to many blue-chip clients, the company and its shareholders should benefit strongly if the acquisition proceeds.


1 Month Stock Chart from FactSet
Source: FactSet