EUR 850.00 For Business Accounts Only

Morningstar | Capgemini Shows Positive Underlying Strength; Digital and Cloud a Boost; Shares at a Premium

Although Capgemini’s second-quarter reported results were largely in line with our expectations, highlighting strong continued foreign exchange headwinds and some mixed sectors, we were cheered by aspects of the firm’s underlying performance. We are seeing healthy activity within the firm’s pipeline of business, with bookings up 11% year over year to EUR 6.64 billion in the first half of fiscal 2018. Also, Capgemini’s performance in the important North American market was very good (revenue up 17.2%), while its digital and cloud business maintained its hot growth trajectory, growing over 20% year over year and contributing to approximately 45% of total revenue. We’ve been touting the importance of the digital and cloud positioning of the overall IT services sector and Capgemini has so far been successful in adapting its portfolio to these newer, high-growth areas. We believe the company’s digital and cloud performance has been helped by its consulting-heavy expertise and ingrained client relationships, which has spurred rapid recent growth for its consulting services division (41% constant-currency year-over-year growth in the quarter), and we see this consulting position as a long-term positive for the firm relative to offshore-based competitors. As a result, we don’t see any catalyst that would change our narrow-moat view of the company. We are maintaining our outlook for the firm and reiterating our EUR 88 fair value estimate. With shares at a premium we’d seek a wider margin of safety before investing.

For the quarter, reported revenue grew 4.7% year over year to EUR 3.31 billion, up 6.7% organically and up 8.7% in constant currency. The result painted a slightly mixed picture though as, by sector, some areas of Capgemini’s business were far better than others. For instance, on a constant-currency basis, financial services and consumer product/retail revenue grew double digits, while telecom and media, and energy and utilities either declined or only squeezed out low-single-digit growth.

On the margin front, the firm’s first-half operating margin rose 20 basis points year over year to 10.9%. Operating margin expansion within the growing application services and consulting services divisions helped drive the modest margin expansion. With the company maintaining its full-year margin outlook of 12.0% to 12.2%, our margins assumptions remain unchanged and we continue to expect modest margin expansion over the midterm.