EUR 850.00 For Business Accounts Only

Morningstar | Capgemini Records Solid Start to Fiscal 2019; Maintain EUR 93 FVE; Shares Overvalued

Capgemini recorded a solid start to fiscal 2019 with broad-based growth across most sectors. The firm restated all its financial objectives for the fiscal year, and we see healthy ongoing demand for the firm’s portfolio, particularly within the digital services space. To that end, digital & cloud revenue grew 20% year over year in constant currency and constituted over 45% of the firm’s revenue. We expect Capgemini’s digital & cloud business to drive moderate long-term growth for the firm as clients look to digitally transform their operations to meet the high demands of today’s modern enterprise. The company is seeing the benefit of a strong foreign exchange tailwind in North America, which helped propel high-single-digit reported revenue growth in the quarter. Yet, the underlying constant currency performance was solid across all geographies in the quarter and gives us confidence in the firm’s ongoing relevancy in the competitive global IT services market. As a result, we maintain our narrow economic moat outlook and EUR 93 fair value estimate. With shares trading above our fair value, we’d seek a wider margin of safety before committing new capital to the name.

For the quarter, reported revenue rose 9.2% year over year to EUR 3.44 billion (increased 6.7% in constant currency and 5.0% organically). North America was the standout region from a reported standpoint as revenue grew 15.3% year over year (up 7.0% in constant currency). APAC & LATAM was close behind North America, up 12.8% in reported terms. Meanwhile, France was the group laggard, yet still reported reasonable growth at 4.8%. Digital transformation continues to drive consulting services that supported robust Strategy & Transformation growth, and we expect this trend to continue due to the company’s strong onshore presence in Europe and North America. We still see business process outsourcing and infrastructure work as stagnating businesses, however.

Capgemini’s operating margin outlook was reiterated by management at 12.3% to 12.6% for fiscal 2019. We expect the firm to hit this target and forecast modest gradual improvement in operating margins over the midterm based on higher value services, optimization of its workforce, and process automation.