After shares of rival Accenture (ACN - Get Report) fell more than 4% following its report, despite beating Wall Street's revenue and earnings estimates, some are concerned that Infosys, India's second-largest enterprise consulting company, will suffer the same fate.
Infosys stock is up more than 20% so far in 2015, topping the 15% gains in shares of Accenture. But here's the thing: Almost all of Infosys' year-to-date stock gains have come just in the past three months, suggesting investors are betting on a strong quarterly report. And that's too much pressure for a stock whose earnings for the just-ended quarter and fiscal 2016 are projected to be flat.
Analysts' average earnings estimate for the just-ended quarter calls for 22 cents a share on revenue of $2.33 billion, translating to flat growth and a 6% increase, respectively. So purely from a risk-vs.-reward perspective, it makes sense to take profits on Infosys shares now and wait to hear what the company says about its business outlook for the rest of the fiscal year, which ends in March 2016.
For the full year, earnings are projected to be flat, reaching 89 cents a share, while revenue of $9.3 billion would reflect an increase of 7.6%. The full-year EPS estimate, which was at 90 cents at the start of the quarter, has been reduced by a penny.
The reason for the earnings stagnancy appears to be related to rising costs. Infosys' operating expenses climbed 11% in the first quarter, almost doubling revenue growth of 5.8%. And with a 50 basis-point drop in gross margins, reaching 36.4% of revenue, earnings were under pressure.
To its credit, the company has a solid balance sheet that includes some $4.5 billion in cash and zero debt. But absent clearer signs of revenue and earnings growth, not to mention rising gross margins, it's tough to place a bet on Infosys stock ahead of Thursday's results, especially with its average analyst 12-month price target of $18.96, only 6% above current levels.