On Thursday, UBS adjusted its stance on Capgemini SE (CAP:FP) (OTC: CAPMF), downgrading the stock from Buy to Neutral despite raising the price target to €235 from the previous €209. The firm cited management's expectations that growth will hit its lowest point in Q1 but will recover to a mid-to-high single-digit rate by the end of 2024, setting up for a strong 2025 based on a "soft landing scenario."
Capgemini concluded 2023 with a 5% reduction in its workforce compared to the beginning of the year and a 3% decrease from its average headcount over the year. This marks the first such reduction since 2009. UBS acknowledged the various factors affecting growth, such as the onshore-offshore mix, utilization, and subcontracting, but emphasized headcount as a crucial element.
The company's guidance for an organic growth rate between 0 and 2% for 2024 is deemed reasonable by UBS, but this growth is expected to be more pronounced in the second half of the year. Management's commitment to achieving a 14% margin by 2025, which would require a 70 basis point increase over two years, leads UBS to anticipate cautious recruitment and growth management in 2025 to maintain utilization rates and gross margin progression.
UBS's growth estimate for Capgemini in 2025 stands at 5.4%, which is below the consensus estimate of 6.9%. The firm's decision to downgrade comes as Capgemini's shares are trading at a 17.7x 12-month forward P/E ratio, surpassing the 10-year average of 16.0x, and a 5.2% free cash flow yield compared to the 10-year average of 7.1%.
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