Company Reports

Narrow-moat Capgemini reported a 3.3% decline in constant-currency sales in its first-quarter trading update. Not completely surprising, as the company previously indicated the first quarter would be the trough in sales growth for the fiscal year. Shares were down around 2% intraday. We don’t expect to make a material change to our EUR 210 fair value estimate. At current levels, the shares look fairly valued.

Capgemini, based in France, is a global leader in the IT services and engineering research and development services markets. It generates revenue mainly by assisting companies with their digital transformation initiatives by providing services such as IT consulting, software application development and maintenance, systems integration, engineering, and business process outsourcing.

Narrow-moat Capgemini reported fiscal 2023 sales of EUR 22.5 billion, up 4.4% versus last year at constant exchange rates and an operating margin of 13.3%, a 30-basis-point increase. Results were broadly in line with FactSet consensus, but slightly lower than our forecast. Guidance for fiscal 2024 is modest, reflecting continued soft business conditions. Nevertheless, shares were up around 3%-4% intraday. We surmise the market is reacting to Capgemini guiding for the trough in growth to be in the first quarter. We don’t expect to make a material change to our EUR 210 fair value estimate. At current levels, the shares look undervalued.

Narrow-moat Capgemini reported third-quarter sales of EUR 5.5 billion, up 2.3% versus last year at constant exchange rates and in line with FactSet consensus. Softness was largely seen regionally in North America and globally in the technology, media, and telecom sector. Guidance for 2023 was maintained. Shares were up around 2% intraday. We will update our model for the latest developments, but do not anticipate a material change to our EUR 210 fair value estimate. At current levels, the shares look undervalued.

Narrow-moat Capgemini reported first-half results that were within our expectations and on-track with company guidance. However, the stock was down nearly 7% intraday. European technology stocks are in the red today, but 7% is an outsize move. We think the market is reacting negatively to the company's announcement to invest EUR 2 billion over the next three years in artificial intelligence, which may be seen as evidence that artificial intelligence is a threat to the industry. We don't expect to make a material change to our forecast of EUR 210 fair value estimate. At current levels, the shares look undervalued.

After taking a fresh look at Capgemini, we are raising our fair value estimate to EUR 210 from EUR 190 and upgrading the company's moat to narrow from none. Our fair value estimate increase is mainly driven by the longer competitive advantage period in our Stage II forecast with the change in moat rating to narrow. Our estimates are broadly in line with FactSet consensus and the company’s midterm strategic targets. Our EUR 210 fair value estimate implies a P/E ratio of 18 times, slightly above its historical average. Despite our in-line forecast, the shares look undervalued. We surmise this reflects uncertainty around the company’s long-term growth rate given we are on the cusp of normalization after the temporary boost to demand that occurred during the coronavirus pandemic.

Capgemini, based in France, is a global leader in the IT services and engineering research and development services markets. It generates revenue mainly by assisting companies with their digital transformation initiatives by providing services such as IT consulting, software application development and maintenance, systems integration, engineering, and business process outsourcing.

Capgemini reported first-quarter results with total revenue largely in line with our forecast. While the firm’s book/bill of 1.02 in the quarter is weak compared with peers, it is strong relative to Capgemini’s average since 2017 of 0.99. As a result, we think demand for Capgemini offerings is in a relatively solid place despite near-term headwinds. Overall, we believe that Capgemini, along with its peers, will benefit from margin expansion in the coming years as their mix shifts toward higher-value add areas, thanks to digital transformation trends. However, we reiterate our no-moat rating for Capgemini, as we have little conviction in the firm’s ability to maintain excess returns on invested capital in the long run. With competitors such as TCS and Infosys increasing its mix toward Europe, we do not see the pressure on Capgemini alleviating anytime soon. Balancing near-term headwinds with our long-term thesis, we are maintaining our EUR 190 fair value estimate. In our view, the decline in share price signals the market being overly cautious, and we therefore believe current shares are attractive.

Capgemini reported mixed full-year results. While the top line beat our forecasts, earnings per share fell slightly short from our expectations. Nonetheless, with a promising book to bill of 1.16 showcasing healthy demand, we think Capgemini’s fiscal 2023 will be more solid than the outlook even with possible currency headwinds. We continue to believe that Capgemini, as well as other top IT services firms, will benefit from margin expansion over the next five years as IT services mix skews toward higher value add areas. However, we reiterate our no-moat rating for Capgemini, an anomaly among our otherwise moaty IT services coverage, as we have little confidence in the company’s ability to sustain excess returns on invested capital in the long term. As a reminder, Indian IT consultancies, such as TCS and Infosys, have been increasing their mix toward Europe over the past several years, which has further led to pressures on Capgemini. Yet, we believe that the market is baking in Capgemini’s puts and takes properly, as the stock has further approached our fair value estimate over the last month. We are maintaining our EUR 190 fair value estimate for the no-moat company, which places Capgemini in fairly valued territory.

Capgemini is a leading IT services provider and has the greatest concentration of revenue in Europe of the top IT services companies. We think Capgemini does not merit an economic moat, as we believe the company is not able to extract the economic value of its switching costs or intangible assets to the extent of its peers. We think this is partially a result of Capgemini’s lower offshore leverage of its employee base, as well as its concentration in Europe, which we believe has led to weaker business in the past and will lead to a slower recovery for the company after the worst of the coronavirus. Altogether, we think that the company’s stable moat trend will stay secure, and forays into the higher value realm of industrials engineering will help ensure Capgemini does not miss on substantial growth trends within the IT services industry at large.

Capgemini’s third quarter was a bright one due to hefty foreign exchange tailwinds coming from a favorable geographic mix with a strengthening U.S. dollar. While results easily surpassed our top-line expectations, since currency tailwinds are not reflective of incremental fundamental long-term strength, we are maintaining our fair value estimate for the no-moat company at EUR 190 per share—leaving the name just straddling 3- and 4-star territory. Currency tailwinds aside, Capgemini showed resilience and healthy demand even with a tough macroeconomic environment. We view Capgemini as moderately undervalued, although shares have recently traded up to around EUR 170 per share. We still believe investors have a better IT services buying opportunity with Cognizant currently trading in 5-star territory (given our $96 fair value estimate).

Capgemini's second quarter was an outstanding one—substantially beating our top-line expectations by 10% and FactSet consensus by 8%— with help from robust foreign exchange benefits. In constant currency, Capgemini saw robust revenue growth from broad-based strength leading to market share gains. Revenue guidance for the year has been boosted, as a result, while the operating margin outlook remains unchanged. This is a stark contrast from peers who have had to cut guidance—either on the top or bottom line. We believe this is a result of Capgemini's focused new go-to-market strategy prioritizing relationships with a subset of clients to win over incremental transformation projects. We’re maintaining our fair value estimate for the no-moat company at EUR 190 per share—which puts the stock right at the cusp of 3- and 4-star territory. Thus, while Capgemini is moderately undervalued, as the market continues to approach our fair value estimate, we think investors have greater IT services buying opportunities in the market—such as Cognizant, which we believe trades well into 4-star territory (given our $96 fair value estimate).

Capgemini reported nice first-quarter results, pleasantly topping our top-line estimate as the IT services industry, as a whole, has been hit with a slew of demand since the COVID-19 pandemic has shed a light on the importance of digital and flexible enterprise IT. Management’s 2022 outlook was reiterated and looks well on track. We are maintaining our EUR 190 fair value estimate for the no-moat company, which places Capgemini in fair value territory.

Capgemini reported mixed fourth-quarter results. While the top line was in line with our previous forecasts, margins experienced greater weakness in comparison, even as we had formerly factored in significant talent-related headwinds. Management’s 2022 outlook was also more moderate than we were expecting, but we are forgiving given the industrywide talent headwinds that are the reason for the discrepancy. We continue to believe that Capgemini, as well as other top IT services firms, will be able to weather the talent constraints that we foresee enduring for the short term. We like that Capgemini makes building out talent a priority amidst this less than favorable market to help moderate the impact. Furthermore, health in digital and cloud demand has us confident that Capgemini's offerings are staying pertinent to the future needs of IT services customers. We are maintaining our EUR 190 fair value estimate for the no-moat company, which places Capgemini in fair value territory.

Capgemini is a leading IT services provider and has the greatest concentration of revenue in Europe of the top IT services companies. We think Capgemini does not merit an economic moat, as we believe the company is not able to extract the economic value of its switching costs or intangible assets to the extent of its peers. We think this is partially a result of Capgemini’s lower offshore leverage of its employee base, as well as its concentration in Europe, which we believe has led to weaker business in the past and will lead to a slower recovery for the company after the worst of the coronavirus. While the company will likely struggle amid the COVID-19 pandemic, we think that the company’s stable moat trend will stay secure, and forays into the higher value realm of industrials engineering will help ensure Capgemini does not miss on substantial growth trends within the IT services industry at large.

Capgemini closed out its third quarter in style, not only with a top line that exceeded our expectations but also a material increase in revenue and operating margin guidance for the full year. We attribute this beat to continued strength across geographies as the global economy bounces back after the pandemic. Given the beat and upward revision of top-line and margin guidance, we're raising our fair value estimate for the no-moat company to EUR 190 from EUR 166--which includes more optimistic growth in our near- and long-term forecasts. With the fair value raise, we view Capgemini as fairly valued, even after the stock is up 6% to EUR 200 per share.

Capgemini is a leading IT services provider and has the greatest concentration of revenue in Europe of the top IT services companies. We think Capgemini does not merit an economic moat, as we believe the company is not able to extract the economic value of its switching costs or intangible assets to the extent of its peers. We think this is partially a result of Capgemini’s lower offshore leverage of its employee base, as well as its concentration in Europe, which we believe has led to weaker business in the past and will lead to a slower recovery for the company after the worst of the coronavirus. While the company will likely struggle amid the COVID-19 pandemic, we think that the company’s stable moat trend will stay secure, and forays into the higher value realm of industrials engineering will help ensure Capgemini does not miss on substantial growth trends within the IT services industry at large.

Capgemini's first half of the year was stellar one--as it beat top-line consensus, based on Factset estimates, all while management made significant changes to its 2021 outlook, for the better. The beat was due to a stronger recovery than expected across all geographies. Given the scale of Capgemini’s outlook adjustments, we’re raising our fair value estimate for the no-moat company substantially to EUR 166 from EUR 134--which includes more optimistic growth in our near- and long-term forecasts. With the fair value raise, we view Capgemini as fairly valued, even after the stock is up 3% to EUR 176 per share.

Capgemini is a leading IT services provider and has the greatest concentration of revenue in Europe of the top IT services companies. We think Capgemini does not merit an economic moat, as we believe the company is not able to extract the economic value of its switching costs or intangible assets to the extent of its peers. We think this is partially a result of Capgemini’s lower offshore leverage of its employee base, as well as its concentration in Europe, which we believe has led to weaker business in the past and will lead to a slower recovery for the company after the worst of the coronavirus. While the company will likely struggle amid the COVID-19 pandemic, we think that the company’s stable moat trend will stay secure, and forays into the higher value realm of industrials engineering will help ensure Capgemini does not miss on substantial growth trends within the IT services industry at large.

Capgemini is a leading IT services provider and has the greatest concentration of revenue in Europe of the top IT services companies. We think Capgemini does not merit an economic moat, as we believe the company is not able to extract the economic value of its switching costs or intangible assets to the extent of its peers. We think this is partially a result of Capgemini’s lower offshore leverage of its employee base, as well as its concentration in Europe, which we believe has led to weaker business in the past and will lead to a slower recovery for the company after the worst of the coronavirus. While the company will likely struggle amid the COVID-19 pandemic, we think that the company’s stable moat trend will stay secure, and forays into the higher value realm of industrials engineering will help ensure Capgemini does not miss on substantial growth trends within the IT services industry at large.