Over the past six months, Genpact’s shares (currently trading at $39.03) have posted a disappointing 18.7% loss, well below the S&P 500’s 21.1% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Genpact, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is Genpact Not Exciting?
Despite the more favorable entry price, we're cautious about Genpact. Here are two reasons there are better opportunities than G and a stock we'd rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Genpact’s revenue to rise by 4.8%, close to its 6.2% annualized growth for the past five years. This projection doesn't excite us and implies its newer products and services will not lead to better top-line performance yet.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Genpact’s margin dropped by 3.9 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Genpact’s free cash flow margin for the trailing 12 months was 11.4%.
Final Judgment
Genpact isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 10.7× forward P/E (or $39.03 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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