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The Price Ceiling on Infosys Stock Persists Following Earnings

INFY stock - The Price Ceiling on Infosys Stock Persists Following Earnings

Source: Shutterstock

Infosys (NYSE:INFY) fell in morning trading after missing on revenue. This sent INFY stock below the $20 per share level yet again.

The $20-per-share price ceiling has plagued the India-based IT consulting firm since 2000. Profits have seen a massive increase since the height of the tech bubble, which should put upward pressure on the stock long term.

Despite the revenue miss, INFY continues to position itself to push its stock higher. This revenue miss does not change the fact that INFY stock can move higher, once it permanently breaks the $20 per share price ceiling.

INFY Stock Met on Earnings, Revenue Missed Slightly

The company reported Q1 earnings per share (EPS) of 25 cents. This amounts of a modest improvement from the same quarter last year when the company earned 24 cents per share. Revenues for the quarter came in at $2.83 billion. Though they showed a year-over-year increase of 6.8%, Wall Street had predicted $2.86 billion. This sent the stock down by close to 4% in morning trading.

The stock also faces a long-time top. INFY stock hit a high of $23.44 at the peak of the tech bubble in 2000. During this period, it pulled back after breaching the $20 per share mark. It did not reach the $20 per share again until 2016, where the equity again hit the ceiling and came back down.

The recent earnings report takes INFY stock below the $20 per share level yet again.

Pressure Builds to Break the Infosys Price Ceiling — Slowly

Given the long-time survival of this ceiling, investors should expect it to remain in place in the near term. However, the fundamentals may finally remove this psychological barrier.

The price-to-earnings (P/E) ratio stands close to 18. That’s close to the five-year average P/E of 17.95. Analysts expect profit levels to remain close to the $1.10 per share the company earned last year for another two years. However, they predict $1.34 in earnings for 2021. They also estimate the average annual profit growth of 10% per year over the next five years.

Investors also need to pay attention to the dividend. The annual dividend now stands at about 67 cents per share. This translates into a yield of around 3.5%. While this dividend amounts to almost double the average S&P 500 dividend, it faces some risks.

Since the dividend is first paid in rupee, investors assume the currency risk. The dividend also changes frequently in its native currency. Still, since 2011, the dividend has generally trended higher. With a 10% five-year growth rate, the dividend will likely either stay near these levels or improve.

Dealmaking backs up this growth. The company partnered with Siemens AG to develop apps for MindSphere. It also works with Santander UK, a division of Banco Santander, S.A. (NYSE:SAN) to provide an inter-bank cash management system to Santander’s customers. Considering its partnerships and growth, the company should remain competitive with peers such as Accenture (NYSE:ACN), Cognizant Technology Solutions (NASDAQ:CTSH), and Wipro Limited (NYSE:WIT).

The Bottom Line on INFY Stock

INFY stock enjoys many positive factors that can push the stock higher — once it can break its 18-year-old price ceiling. In its Q1 earnings report, Infosys met earnings expectations but saw a slight miss on revenues. This took the stock below the psychologically-important $20 per share level yet again.

Although analysts expect earnings growth to stagnate for the next two years, they also believe earnings will see double-digit growth beginning in 2021. A rising dividend with a yield of 3.5% also bodes well for the stock.

Both the dividend yield and the P/E above 18 would not break the price ceiling on INFY stock by themselves. However, rising profits and continued dividend increases will build pressure. This pressure will break the ceiling at some point. When this barrier finally falls away, expect INFY stock to spring higher.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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