Technology - Software &
Services
Stockpicking Is Key in the
Next Leg of the Recovery
Screening for the right lead indicators: We’ve
backtested a group of indicators to see what works. The
IFO, our longtime favourite, and US Tech Hardware
Orders work best as buy signals. We think they could be
useful in timing an exit strategy too. Under this
framework, however, it looks too early to turn broadly
negative on the sector.
Introducing a stockpicking framework for the next
phase of a recovery: Six months after the trough, all of
the sector’s gains have been on a re-rating hope as
macro data stabilise. Sector multiples have around
20-25% further to go to reach their long-term average.
Now stockpicking is more important. We introduce a
framework to screen for stocks with the best growth,
exposure to structural drivers, the least risk and the most
attractive valuations.
Structural themes and key picks: We focus on four
themes to play in 2010: 1) consolidation; 2) information
mgmt & analytics; 3) cloud computing; and 4) public
sector opportunities from outsourcing and from US
healthcare stimulus. Our key picks are SAP, Capgemini,
and Logica, as well as Sage and Steria, both of which
we upgrade to OW. In our view, SAP has the most
compelling balance of growth (16% EPS growth to
2012e) and valuation (15x 2010e PE).
Upgrading Sage and Steria to OW: We take Sage to
OW and lift our PT to 270p (~20% upside). We think the
market has underestimated the benefit from Sage’s cost
actions and the weak GBP, and so see CY10 consensus
estimates as 10% too low. At 12x CY10 EPS, Sage
offers compelling value. We also upgrade Steria to OW,
and see its mix of offshore and BPO as likely making it a
prime beneficiary of any rise in public sector
outsourcing.
Downgrading Indra to EW and Dassault to UW: We
see both as high quality, but see limited EPS growth now
at Indra, and a full valuation at Dassault.