Cap Gemini's stock moved up strongly from Euro 30 per share in November 2005 to the 45 in mid-2006 but then has been stuck in neutral mode. What gives?
Business is good, according to the company and the general feeling among equity analysts. IT spending remains high for the most part. Cap Gemini SA's senior management painted a good upbeat picture in their recent US roadshow. The biggest issue is the margin as percentage of sales, which they are aggressively pitching, though this does seem realizable, given their increasing use of offshore resources, higher consulting rates all across the board, and better management of cost and personnel.
So CapGemini SA now has to deliver on its promises and it appears that investors are quite receptive to listening. But there are key overshadowing industry landscape considerations, most notably investors' perceptions of slower economic growth and consequences for IT players.
A key factor is IT spending by companies - and this works somewhat to CapGemini SA's advantage. Good spending equates to more projects, while economic softness leads CTOs to consider offshoring to reduce costs, where Cap also has good capabilities. Capgemini SA has also stepped up its M&A efforts, and recently bought a stake in Unilever's Indian offshore subsidiary. More deals are likely, mainly in India. Further, CapGemini is linked more to Europe than the US, so as the European IT service sector follows the US but in a later cyclical mode, CapGemini should be less affected. Certainly, investors are expecting some kind of slowdown, so Price to Earning ratios are going to remain compressed, the jump has to come from Earnings.
Analysts are pegging the stock price now close to EUR 50 per share. There are much headwinds to get there, but if Accenture's recent stock performance were any indication, then CapGemini can rest assured that company performance is the final arbiter in stock price valuation. Show me the performance, say investors, and the stock price will follow.
For more articles please visit :
http://www.big4.com/newsletter/Big4Oct2006Vol-2NewsLetter.htm
