JP Morgan downgrades Softcat on slow earnings growth

by | Nov 21, 2023

(Sharecast News) – JP Morgan has downgraded its rating on Softcat from ‘neutral’ to ‘underweight’, saying that the IT infrastructure and services provider’s slow earnings growth doesn’t justify the stock’s premium valuation.
The bank has slashed its target price for the shares from 1,400p to just 1,150p, well below Tuesday morning’s price of 1,260p, down 3.2% on the day.

“We revisit Softcat’s equity story following our summer initiation and reviewing recent industry datapoints. We downgrade Softcat to ‘underweight’ as we see a more challenging outlook vs. peers not yet fully captured in its premium valuation,” said analyst Joseph George.

“From here we see downside risk to consensus earnings,” he said.

Following the company’s annual results last month, George said that JP Morgan’s negative view is a result of four main factors: expected margin dilution due to fast headcount expansion and ongoing investments; demanding consensus forecasts after gross sales missed expectations in the second half; Softcat’s overexposure to the UK with an over-reliance on small business customers in a tough economic environment; and consensus estimates not fully reflecting profits being weighted to the second half of the new financial year.

George also pointed out that Softcat is now growing slower than sector peer Bytes, with compound annual growth rates easing from 23% between 2018-2022 to just 11% between 2023-2025.

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