Luxoft's Risk-Reward Improving, But Credit Suisse Says It's Neutral Until Evidence Of Growth Emerges

After software development company Luxoft Holding Inc (NYSE: LXFT)'s investor day, an analyst at Credit Suisse moved to the sidelines. 

The Analyst

Analyst Charles Brennan upgraded Luxoft from Underperform to Neutral and lowered the price target from $45 to $35.

The Thesis

Luxoft's broad strategy of focusing on digital transformation, faster growth segments of the market and areas where it can add value all appear sensible, Brennan said in a Friday note.

Luxoft discussed its opportunity in the automotive segment, where it expects 35-percent annual growth, the analyst said.  

Looking into the medium-term, the company has targeted 17.5-percent growth and EBITDA margins of 17 percent, Brennan said. 

If the company hits the targets, the analyst said shares would be trading at or near a trough earnings multiple.

Notwithstanding the improving risk-reward profile, Brennan expressed uneasiness about the difficulty in verifying company data points. Highlighting the gap between the management's 2018 organic growth target of 18 percent and his 12-percent estimate, the analyst said he is unsure of the underlying growth.

Looking at Luxoft's recent performance, Credit Suisse said the company could add $400 million in revenue and little growth in non-GAAP EBIT.

"Until management can demonstrate it can sign profitable new business, we think questions will remain about the quality of the organic growth." 

Reflecting the recent Q4 results, Credit Suisse lowered its 2019 and 2020 earnings per share estimates by 23 percent and 22 percent, respectively.

Until greater tangible evidence of progress emerges, the shares are likely to trade at the low end of sector valuations, Brennan said. 

The Price Action

Luxoft shares have shed about 36 percent year-to-date.

The shares were down 1.4 percent to $35.30 at the time of publication Monday. 

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