The technology industry has continuously shown resilience and adaptation despite current macroeconomic challenges. Therefore, quality tech stocks International Business Machines Corporation (IBM), Capgemini SE (CGEMY) and Leidos Holdings, Inc. (LDOS) could be wise additions to your portfolio now. These stocks are B-rated (Buy) in our proprietary POWR Ratings system.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the tech industry.
With technological improvements and a growing reliance on digital solutions, this sector is predicted to grow exponentially and contribute considerably to the country’s economy.
The global IT services industry is expected to grow at a CAGR of 9.7% until 2030. The market is expanding rapidly as a result of the broad adoption of cloud computing, cybersecurity, innovation, automation, data security concerns, AI, machine learning, big data, IoT, and compliance with data privacy regulations.
Moreover, the US IT services market is estimated to reach $306.10 billion by 2028, increasing at a CAGR of 7.1%.
Investors’ interest in tech stocks is evident from the iShares U.S. Technology ETF’s (IYW) 18% returns over the past six months and 43.8% over the past nine months.
In light of these encouraging trends, let’s look at the fundamentals of the three top-rated Technology - Services stocks, beginning with number 3.
Stock #3: International Business Machines Corporation (IBM)
IBM provides hybrid cloud, AI, and business services. It offers integrated solutions and products that utilize data and information technology across various industries and business processes. The company operates through four segments: Software; Consulting; Infrastructure; and Financing.
On October 2, 2023, IBM announced that The US Chamber of Commerce Foundation is investigating the possibilities of AI, notably in skills-based recruiting, with the assistance of IBM's experience to analyze risks and develop trust in AI solutions.
The collaborative initiative emphasizes the necessity of resolving any unintended consequences and aligning AI with principles such as safety, accountability, fairness, and efficacy, demonstrating IBM’s commitment to responsible AI and consulting capabilities.
IBM’s forward non-GAAP P/E multiple of 14.84 is 31.8% lower than the industry average of 21.77. Its forward Price/Cash Flow multiple of 10.30% is 48.2% lower than the industry average of 19.89.
IBM’s trailing-12-month ROCE of 10.43% is 767.4% higher than the 1.20% industry average. Its trailing-12-month ROTA of 1.53% is significantly higher than the 0.02% industry average.
For the fiscal second quarter that ended June 30, 2023, IBM’s income from continuing operations increased 7.9% year-over-year to $1.58 billion. Its non-GAAP gross profit increased 2.1% year-over-year to $8.65 billion. The company’s net income grew 13.7% from the year-ago value to $1.58 billion, while its EPS increased 12.4% year-over-year to $1.72.
The consensus revenue estimate of 62.27 billion for the year ending December 2023 represents a 2.9% increase year-over-year. Its EPS is expected to grow at 4.8% year-over-year to $9.57 for the same period. It surpassed EPS estimates in three of four trailing quarters. IBM’s shares have gained 19.7% over the past year to close the last trading session at $142.20.
IBM’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
IBM also has a B grade for Growth and Quality. It is ranked #25 out of 73 stocks in the Technology - Services industry. Click here for the additional POWR Ratings for Value, Stability, Momentum and Sentiment for IBM.
Stock #2: Capgemini SE (CGEMY)
Headquartered in Paris, France, CGEMY provides consulting and technology services. The company operates through the segments of Application services; Technology and Engineering services; Consulting services; and Other Managed services.
On September 28, 2023, CGEMY announced the acquisition of HDL Design House, a leading European provider of silicon design and verification services. This transaction, which closed on September 27, is intended to broaden CGEMY's global silicon engineering capabilities, solidifying the company's position as a leader in the intelligent industry revolution.
CGEMY’s forward EV/Sales multiple of 1.45 is 44.2% lower than the industry average of 2.60. Its forward EV/EBIT multiple of 11.15% is 36% lower than the industry average of 17.43.
CGEMY’s trailing-12-month ROCE of 17.78% is significantly higher than the 1.20% industry average. Its trailing-12-month ROTA of 6.61% is significantly higher than the 0.02% industry average.
CGEMY’s revenues for the fiscal first half of 2023, increased 6.9% year-over-year to €11.43 billion ($12.03 billion), while its operating profit increased 7.8% from year-ago value to €1.15 billion ($1.21 billion).
The company's net profit and EPS were €809 million ($851.76 million) and €4.54, respectively, up 21.3% and 20.1% from the same period last year.
Street expects CGEMY’s revenue to increase 3.3% year-over-year to $24.18 billion for the year ending December 2023. Its EPS is expected to grow 3.7% year-over-year to $2.37 for the same period. Over past year the stock has gained 9.7% to close the last trading session at $34.80.
CGEMY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #24 in the same industry. It has a B grade for Stability. To see additional CGEMY’s ratings for Momentum, Growth, Value, Sentiment and Quality, click here.
Stock #1: Leidos Holdings, Inc. (LDOS)
LDOS together with its subsidiaries, provides services and solutions in the defense, intelligence, civil, and health markets in the United States and internationally. It operates through three segments: Defense Solutions; Civil; and Health.
On October 5, 2023, LDOS is launching ProSight™, its newest enterprise software platform. ProSight, which provides airports and organizations with high-risk points of entry with a consolidated security management system, will be unveiled Oct. 10-13 in Munich, Germany. By launching ProSight, LDOS hopes to transform the way airports and organizations handle their security systems.
LDOS’s forward EV/Sales multiple of 1.17 is 28.5% lower than the industry average of 1.63. Its forward Price/Sales multiple of 0.83% is 37.5% lower than the industry average of 1.32.
LDOS’s trailing-12-month ROCE of 16.46% is 21.6% higher than the 13.54% industry average. Its trailing-12-month asset turnover ratio of 1.15x is 41.1% higher than the 0.81x industry average.
LDOS’s revenues came in at $3.84 billion in the fiscal second quarter that ended June 30, 2023, up 6.7% year-over-year. Its adjusted EBITDA came to $420 million, up 14.8% year-over-year.
The company’s net income grew 22.1% from the year-ago value to $210 million, while its non-GAAP EPS increased 13.2% year-over-year to $1.80.
Analysts expect LDOS’s revenue to increase 5% year-over-year to $15.12 billion for the year ending December 2023. Its EPS is expected to grow at marginally year-over-year to $6.68 for the same period. It surpassed EPS estimates in three of four trailing quarters. Shares of LDOS’s has gained 7.2% over the past three months to close the last trading session at $94.41.
It’s no surprise that LDOS has an overall B rating, equating to a Buy in our POWR Ratings system. It has a B grade for Stability, Value, Momentum and Sentiment. It is ranked #13 in the same industry.
Beyond what is stated above, we’ve also rated LDOS for Growth and Quality. Get all LDOS ratings here.
What To Do Next?
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IBM shares were trading at $142.93 per share on Tuesday afternoon, up $0.73 (+0.51%). Year-to-date, IBM has gained 5.29%, versus a 15.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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