Investing.com -- Shares of Capgemini (EPA:CAPP) jumped on Tuesday after BofA Securities upgraded the stock to “buy" from “neutral”, raising their price objective to €250 from €209, reflecting a 38% upside potential from the current valuation.
At 7:21 am (1121 GMT), Capgemini was trading 6.3% higher at €191.80.
The upgrade follows Capgemini’s recent guidance reset, which occurred after the company cut its fiscal year forecast in July 2024.
“We now believe that the level of mid-term growth expectations is more realistic, with consensus down to -1.6%/+3.6% growth for 2024/2025 vs. +0.7/+6.7% in June, while relative valuation to global peers is back to attractive levels, at multi-year relative lows,” said analysts at BofA Securities.
BofA flagged Capgemini’s valuation as a key reason for the upgrade. The company is trading at a 45% discount to Accenture (NYSE:ACN), compared to a historical discount of 31%, offering significant upside potential for investors. Capgemini's price-to-earnings ratio of 15x is at its long-term low relative to global peers.
BofA pointed to positive demand signals from global IT services peers, particularly in the U.S. and India, where IT services indicators are showing their best performance since the first half of 2022.
The BofA Europe IT Services Indicator also indicates a gradual recovery in demand, particularly in the hiring activity component, which has improved markedly. This aligns with Capgemini’s forecast for gradual mid-term growth recovery and the broader market’s improving outlook.
Capgemini is well-positioned to benefit from the growing demand for digital transformation, particularly around cloud services and the implementation of Generative AI technologies.
BofA believes that Capgemini’s expertise in these areas, combined with a more stable demand environment, positions it for meaningful long-term growth.
The consensus base case for 2025 assumes a 3.5% growth rate, which BofA sees as realistic and potentially benefiting from GenAI-driven projects.
Despite BofA's optimism, the brokerage recognizes that challenges remain. The outlook for discretionary spending on IT services remains uncertain, particularly in sectors like aerospace and autos, where Capgemini has exposure.
Nonetheless, the company’s focus on cost-takeout services and managed services could help mitigate this risk, especially as companies prioritize operational efficiency over discretionary consulting projects.