Acquisition Of FWD View Will Strengthen Position In Financial Services Sector

Key Takeaways

• Strategic acquisitions and partnerships aim to enhance technological and geographical growth, driving revenue opportunities across various sectors.
  
• Improved cash flow and reduced financing costs position Nagarro for future investments and potential earnings growth.
  
• Market challenges and geopolitical uncertainties threaten Nagarro's revenue growth and profitability, compounded by sector decline and seasonal impacts.

Catalysts

Provides digital product engineering and technology solutions in North America, Central Europe, rest of Europe, and internationally.

• Nagarro's partnership with NetRoadshow and the acquisition of FWD View highlights its strategy of expanding technological capabilities and geographical reach, potentially leading to increased revenue opportunities.
  
• The company’s commitment to diversifying across industries and regions, especially with the strong performance in the Public, Non-profit, and Education sectors, indicates potential for revenue growth by tapping into varied markets.
  
• Nagarro's improved cash flow and strong operating cash inflow position them well for future investments in growth, suggesting potential for enhanced earnings as these investments mature.
  
• Lifting the voluntary restrictions on factoring programs due to improved cash generation ability could positively impact net margins by reducing costs associated with these financing measures.
  
• The acquisition of FWD View strengthens Nagarro’s position in the financial services sector, indicating potential for increased revenue from higher-margin data-driven solutions.

Nagarro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nagarro's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 7.5% in 3 years time.
• Analysts expect earnings to reach €95.8 million (and earnings per share of €6.99) by about January 2028, up from €54.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, down from 20.3x today. This future PE is lower than the current PE for the DE IT industry at 19.4x.
• Analysts expect the number of shares outstanding to grow by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

Nagarro Future Earnings Per Share Growth

Risks

• Slow demand growth for digital IT services and uncertainty in market recovery could impact Nagarro's future revenue projections.
  
• The decline in the Horizontal Tech segment, one of the weakest-performing industries, could negatively affect earnings and industry diversification.
  
• Pressure on margins due to slower-than-expected growth with continued cost optimization efforts may not fully offset decreased profitability.
  
• Seasonal fluctuations and potential client shutdowns during holiday periods can result in lower revenues and earnings in certain quarters, particularly impacting Q4 performance.
  
• Geopolitical and macroeconomic uncertainties, including consumer spending slowdowns, add complexity and risk to revenue growth and overall financial performance forecasts.

Valuation

• The analysts have a consensus price target of €112.25 for Nagarro based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €135.0, and the most bearish reporting a price target of just €102.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.3 billion, earnings will come to €95.8 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of €82.9, the analyst's price target of €112.25 is 26.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.