Morningstar | Digital and Cloud Services Drive Successful 3Q for Capgemini; Maintain EUR 88 FVE
Capgemini's third-quarter results marked its continued strong grip on the IT services market, even in this traditionally low-booking quarter. All regions experienced revenue growth, with digital and cloud revenue continuing to drive the performance. With the full impact of Europe’s cloud transition yet to come and Capgemini’s digital acquisitions proving fruitful in the meantime, we continue to be optimistic in terms of the company's top- and bottom-line improvement over the next five years. We are maintaining our EUR 88 fair value estimate. The stock is still priced at a premium, and we’d recommend a greater margin of safety before investing in this narrow-moat company.Capgemini reported third-quarter bookings up 6.7% at constant currency to EUR 2.81 billion, while revenue rose 7.7% year over year to EUR 3.23 billion. Revenue grew across all sectors, although the telecom, media, and entertainment segment (which only grew 70 basis points at constant currency) was a notable laggard. North America revenue grew 12.9% year over year at constant currency, thanks to healthy growth in the financial services, consumer products, and retail sectors. U.K. revenue reversed its negative revenue trend this quarter as a result of momentum in the energy and utilities sector, and we believe the recent acquisition of U.K.-based Adaptive Lab also helped. Overall, digital and cloud services continued its revenue growth streak of over 20%.
Expecting a robust fourth quarter, Capgemini raised revenue growth guidance from just over 7% to now 7.5% at constant currency and maintained its organic cash flow goal of over EUR 1 billion and operating margin range of 12%-12.2%.
Capgemini continues to prove itself capable of handling complex enterprise trends from the get-go, for example, through its recent work in digital twins with nuclear plants. This adaptability supports our narrow moat rating and our belief that Capgemini will continue to be a trusted partner to its customer base. While concerns have been raised about the company's foray into marketing with the launch of Capgemini Invent, which could cause a lack of focus, we don’t see this as a threat, given Capgemini’s claims that the business will be contained.
Capgemini is a consulting and IT services provider. Co. works closely with technology partners at the cutting edge of innovation in major trends such as: Cloud, Big Data and mobility. Co. offers its clients skills in a variety of fields, such as digital transformation and digital customer experience, Cloud, Big Data, mobility, testing, cyber security, application management. In addition, Co. helps its clients enhance their performance and sharpen their competitive edge by offering them a range of skills grouped around four major businesses: Consulting Services through Capgemini Consulting, Technology Services (TS), Local Professional Services through Sogeti, and X Outsourcing Services (OS).
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