Infosys Outlook Might Impress Wall Street More Than Q4 Improvement
Wall Street seems to be more interested in what the Indian outsourcing companies will do next than how they performed previously. No surprises are expected when one of the biggest, Infosys ( INFY ), reports its fiscal 2016 fourth-quarter earnings way after the close Thursday, scheduled for 11:45 p.m. ET — or about 9:15 a.m. Friday in Bangalore. The consensus of analysts polled by Thomson Reuters suggests Infosys will report earnings up 5% to 23 cents minus items, on revenue up 13.6% to $2.43 billion for the quarter ended March 31. That would be its best revenue growth rate in six quarters and its best earnings growth in the last five quarters. Robert W. Baird analyst David Koning sees the EPS consensus as “reasonable,” but anyone expecting a tad above consensus for revenue “seems aggressive based on historical trends,” he said in a Tuesday research note. Baird rates Infosys stock neutral, with a 19 price target. Cowen analyst Bryan Bergin, who rates the stock as market perform with an 18 price target, says the company’s Q4 “results tend to be seasonally soft, and we don’t expect any surprises there with low single-digit sequential revenue improvement, modeled at 1.4% (quarter to quarter in U.S. dollars, or about 2% in constant currency).” Instead, Bergin said, “the primary focus will be its FY’17 guide. In sum, expectations are somewhat elevated going into this print, given INFY’s recent momentum. We think a year-on-year top-line (in constant currency) growth midpoint of (about) 12% is benchmark for expectations. (We model a foreign-exchange headwind of 2.5%.) Its guide on operating margin will also be a key focus; we think at worst, a flat operating margin target range of 24%-26% is built into expectations, given its ambitious long-term target of 30% by 2020.” Analysts expect fiscal 2017 EPS of 98 cents minus items on revenue of $10.41 billion, up from an expected 90 cents and $9.46 billion, respectively, the previous year. For fiscal 2015, Infosys earned 87 cents per share minus items on $8.61 billion. Will Infosys Impact Cognizant? Analyst Koning seems as interested in what Infosys’ guidance does for rival Cognizant Technology Solutions ( CTSH ) as what it does for Infosys. He issued a separate research note just on Infosys’ impact on Cognizant. “CTSH likely holds up OK, even if INFY guides fiscal 2017 revenue a bit below the Street,” Koning said. “When INFY provided initial full-year guidance below the Street in each of the last three years, INFY was down 5%-21%, but CTSH was (down) 3% to (up) 1%.” Cognizant stock was flat in early trading in the stock market today, near 59.50. Infosys stock was down a fraction, near 18. Cognizant is trading 14% off a 69.80 record high set Oct. 28. Infosys is trading 6% off a 16-year high of 19.49 set April 4. While Infosys earns a strong IBD Composite Rating of 83 — meaning it’s outperforming 83% of S&P 500 companies on earnings, sales, institutional ownership, stock activity and other metrics — Cognizant rates even better with an 87. Bigger tech outsourcer Accenture ( ACN ) rates an 89, while the best in the group are the relatively small CGI Group ( GIB ) (with a 92 CR) and CDW ( CDW ) (with a 91). As organizations look to digitize their operations and move to the cloud, Cognizant, Infosys and other tech outsourcers are becoming increasingly important as a way to start or accelerate the process, as a means to contract-out process management entirely and as a way to limit or reduce expenses. Service-level agreements “are changing to reflect this (conversion from business-process outsourcing to business-process management ), becoming more business-outcome-focused and leading the market to shift from a pure RFP (requests for proposal) procurement approach to a managed-service, end-to-end solution offering,” Cowen’s Bergin said in an April 1 research note.