Enterprise IT consulting specialist Infosys (INFY) will report third quarter fiscal 2020 earnings results before of the opening bell Friday. With the stock falling 11% over the past three months, it would seem investors have begun to wonder whether Infosys’ position in the IT services market is on shakier ground than previously thought.
Infosys shares have fallen 10% and 6% over the past nine months and six months, respectively. The stock has been under pressure after the company disclosed it is under investigation by the SEC which is looking into a whistleblower complaint that alleges the company has engaged in unethical practices to increase short-term revenue and profits.
Infosys, which has denied the allegations, said it will "vigorously" defend itself. Adding, “The whistleblower complaint has been placed before the Audit Committee as per the company’s practice and will be dealt with in accordance with the company’s whistleblowers’ policy.” It remains to be seen what the outcome of the investigation will be. And this topic, which has taken away from the modest operational improvements of the company, will certainly be raised by analysts on the conference call.
For the quarter that ended December, the average analysts earnings per share estimate calls for 14 cents per share on revenue of $3.24 billion. This compares to the year-ago quarter when earnings came to 13 cents per share on revenue of $3.04 billion. For the full year, ending March, earnings are projected to be 54 cents per share, up from 51 cents a year ago, while full-year revenue of $12.84 billion would be an increase of 8.8% year over year.
Despite increasing competition from rivals such as Accenture (ACN) and Cognizant (CTSH), the fact that Infosys’ full-year revenue is projected to rise by almost double digits underscores the strength of the business. In the second quarter, revenue was also a bright spot, rising 10% year over year on the strength of a 38% surge in Digital revenue. The company’s COO, Pravin Rao, boasted about the number of large deals Infosys won which reached $2.8 billion.
The company is no longer shedding customers as it has in the past. What’s more, Q2 operating margin rose to 21.7%, 1.2% improvement over prior quarter, which suggests the company is finding ways to build value. Granted, it wasn’t all good news. Investors weren’t happy with the EPS miss, which sent the stock lower more than 1.5%. To get the stock heading in the right direction, Infosys on Friday will need to deliver a firm EPS beat along with upbeat revenue and margin guidance.
What's more, based on fiscal 2021 estimates of 59 cents per share, calling for an increase of about 9% increase, Infosys is projected to accelerate its earnings growth by about four percentage points. This means with INFY stock, which is trading at around $10 today, is priced at just 16 times fiscal 2021 estimates, which is three points lower than the S&P 500 index, suggesting good value.
So with INFY stock rising just 4% over the past year, compared to a 32% for the S&P 500, Infosys could be a decent bounce-back candidate for investors with an appetite for risk.
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