Capgemini: Sales Growth Decelerating as Expected; Shares Undervalued

Narrow-moat Capgemini CAP 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.

Guidance for 2023 was confirmed at revenue growth of 4%-7% in constant currency, an operating margin of 13%-13.2%, and organic free cash flow of around EUR 1.8 billion. Our estimates are within the guidance range.

For the fourth quarter, constant-currency revenue growth is expected to be between negative 1.5% and 0.5% as clients continue to tighten spending. The scope impact to growth should be around 0.5% in the fourth quarter and for the full year. Capgemini expects the operating margin for 2023 to be at the top end of the range, which is 13.2%.

Revenue growth continued to decelerate as expected in the third quarter due to the challenging economic environment. While demand for digital transformation services remained robust, clients are focusing on projects with a faster payback and those driving operational efficiency and cost reductions.

Sales declined 4% in North America, which is often seen as the bellwether for the global IT services industry. The U.K. and Europe continued to grow at rates around 4%-5%. The Asia-Pacific region and Latin America reported the strongest growth in the quarter at 7.6%, driven by Asia. By sector, the public sector was generally strong in all regions except North America and grew at a double-digit rate, overall. In contrast, the TMT sector declined in most regions and financial services was also weak.