EUR 850.00 For Business Accounts Only

Morningstar | Capgemini Closes Fiscal 2018 on Good Note; Healthy Digital & Cloud Position; Shares Fairly Valued

Capgemini closed out fiscal 2018 on a good note with the company meeting its midterm organic growth target ahead of schedule. The firm’s full-year constant currency revenue growth was 8% year over year and reflected a good competitive position for in-demand services surrounding digital and cloud technologies, and notable outperformance in industries such as financial services where we believe the company grew faster than the overall market. We think Capgemini has been successful after committing to a wholesale change in approach to the market about three years ago. Over this time, we’ve seen a significant and rapid pivot to digital and cloud services, and now this combined line of business constitutes approximately 45% of group revenue. We see digital and cloud services as primary growth drivers for the company over the mid to long term and, as such, forecast a healthy level of top-line growth for this highly regarded global IT services firm. We think the firm remains well embedded within its multinational clients, particularly in Europe and continue to see a stable position for this narrow economic moat firm. As we account for the full-year result and updated (mostly in line) guidance, we slightly raise our fair value estimate to EUR 93 from EUR 88. With shares trading in 3-star territory, we’d suggest a wider margin of safety before committing new capital to the name.

For the quarter, reported and constant currency revenue rose 7.8% year over year to EUR 3.5 billion (grew 5.7% on an organic basis). Consulting Services was the obvious standout in the quarter and reflected a year in which the consulting business surged. We had predicted this growth rate owing to not just acquisitions, but also the necessary requirement of consulting capabilities as clients look to more hands-on work surrounding digital and cloud services.

Technology & Engineering Services and Application Services also performed well in the quarter and year. However, Other Managed Services was a growth laggard with revenue declining 2.1% in the quarter. We believe the decline is attributable to poor market conditions on business process outsourcing like fierce competition and pricing pressure, and a hangover from some poor infrastructure services performance at the start of the year. We expect the Other Managed Services line to remain a laggard over the midterm owing to the secular nature of some of these issues.

Capgemini’s operating margin was 12.1% for the year (in line with our expectation of 12.1%). The firm is guiding for a fiscal 2019 operating margin in the region of 12.3% to 12.6% (our forecast called for 12.5%) and we think this is a reasonable and achievable target. The company has proven its ability to gradually eek out modest year-over-year margin expansion, and we expect this continue as it focuses on high value services, optimization of its workforce, and process automation.