Sentiment Timing Stock Watch – “Identifying Institutional Entry & Exit Levels”
Shorter Term Target: $25.74 + 6% from entry
Medium Term Target: $26.81 + 10% from entry
Longer Term Target: $28.01 + 15% from entry
Risk Management: Stop if price closes below $22.63. This could indicate a trend change
Average Volume (50-day): 828k Beta: 0.59/ Forward P/E: 15.1x
Medium Term Catalyst: Q4 Numbers due early Feb (tba)
Fundamental Outlook For G
- The share has been pushing higher since early November (chart above), and recent weeks has seen a compelling series of higher lows (in conjunction with bullish engulfing candles), with the probability of a further break above current levels in the short term. The MACD has also crossed to the upside, with the RSI also trending higher from its summer lows
- From a standalone basis G trades at a 7% discount to its five year average when viewed on a Price/ Earnings basis. Applying this discount to the current share price would imply an upside target of $26.04. G also benefits from an Altman Z-Score of 3.52 (a read of >3 generally indicates relatively solid underlying company financials)
- On a Peer perspective G looks attractive when viewed on a Price/ Earnings, Price/ Book, and Price/ Sales basis. Genpact does not currently pay a dividend
- Q3 filings (released November 2nd) saw total revenue ahead by 7% on a constant currency basis with adjusted EPS ahead by 6% versus the same year ago period. Over the quarter G repurchased
approx $156 million of stock under its $750 million share repurchase program, (total purchases approx $469 million since inception of program in February 2015)
Genpact, originally part of GE, and spun off in 2005, is a leading global provider of business process management services. Latest figures – released 2nd November source www.genpact.com Q3 diluted EPS of 33 cents per share (+5% versus the prior year period)
The numbers were underpinned by recent contract wins, and continuing strong fundamentals in the group’s BPO operation. Top-line also showed an uplift of 5% to hit $648.8 million (ahead by circa 7% on a constant currency basis)
Operations (Year on Year basis)
Gross Profit + 5.9% @ $256.4 million
Cost of sales + 4.4% @ $392.4 million
Gross Profit % of Revenue: 39.5% + 30 bps
Revenue Details (Year on Year basis)
Global Clients + 8% @ $543 million (representing approx 84% of total revenues)
GE Revenue (-8%) @ $106 million (representing approx 16% of total revenues)
Total BPO Revenue + 9% @ $526 million (representing approx 81% of total revenues)
Cash from operations ($144 million – Q3 2016/ $139 million Q3 2015)
Cash and liquid assets ($419 million – Q3 2016/ $468 million Q3 2015)
Capital expenditure as a % of revenues: circa 3%
Management Guidance/ Outlook G expects total revenue for FY2016 in the range $2.57 to $2.58 billion (this figure includes an assumed negative foreign exchange impact of $43 million) and adjusted non-GAAP diluted EPS of between $1.42 and $1.43
Management Commentary “In the third quarter, our Global Client BPO revenues significantly accelerated to 15% constant currency growth. We saw recent deal wins ramp and our transformational digital and analytics services, led by our highly differentiated Lean DigitalSM approach, continued to gain traction and grew more than 20%.”
Anchor tailwinds: Medium term: The chart to the right is that of U.S. Gross Domestic Product Growth. After a period of lower growth in the latter part of 2015, the figure has picked up significantly as at the latest September quarter with the next release due January 27th. Needless to say a more positive economic backdrop is advantageous for names such as Genpact.
Growth: By 2020 worldwide IT spending is expected to approach some $3 trillion in annual spend, led by the likes of sectors such as manufacturing, telecommunications and financial services.
Sector flows: Within the S&P500, the tech sector now accounts for more than a 20% weighting, well ahead of Healthcare and Financials, each of which account for some 15%.
The chart to the left is that of Technology Select Sector SPDR ETF (XLK). Over the course of 2016 it returned over 25% from its February 2016 lows to the end of December.
The more positive product inflows underpinned this increase, (with XLK seeing over $750 million in net inflows over this period. A sign that investor’s are still relatively bullish on the space.
Investor sentiment on the stock: Currently ‘outperform’ with average target prices in or around $28 (some 15% ahead of current levels)
Insider activity: The stock saw a number of sales over recent months
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