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MARKET COMMENT
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Logica (LSE: LOG) shares tumbled 50p (17%) to 244p this morning. The IT services group stated that earnings per share (EPS) for the full year would be "significantly below" the level achieved the year before. Difficult trading at Logica's Mobile Networks operation caused the profit shortfall. Telecom operators in Europe and Japan were said to be "striving to contain cash", with the penny-pinching causing delays to multi-media messaging services and other 3G-related software orders. With revenues of £1,133m generated in the year ending June 2001, it's worth noting that Logica's Mobile Networks division contributed sales of only £312m. The balance was made up through more traditional IT services to companies involved in energy, finance and the public sector. Today's statement revealed turnover in these areas had moved "just ahead", although margins had fallen "slightly". After reporting eight years of EPS growth at a 40% compound annual average, there's no doubting Logica is one of the country's (if not, one of the world's) pre-eminent IT firms. That said, the Euro, the Millennium Bug and the rapid growth of mobile phone usage all underpinned the company's late 1990s performance. The big question is: can the historic levels of profitability be repeated? If you believe long-term demand for general IT services will not wane, and Logica will remain in the higher echelons of its industry, then today's share price reaction has left an investment opportunity. Last year, Logica reported EPS of 25.4p. Assuming it takes five years for EPS to climb back to that level, with a 'recovering' Logica then valued at 17.5 times prospective earnings, a share price of 444.5p could be seen during 2007. If the historic 5p dividend is maintained over that time too, another 25p per share would be collected. On those assumptions, at 244p per share, a five-year compound return of 14% is on the cards. For believers in IT, Logica at the present price looks worth the risk. More: Logica discussion board