Cognizant Stamps Passport To Growth

1/6/2014


  Recent Price
$99
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
24
  Shares (millions)
304
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$99.64 - $60.92

Cognizant Technology Solutions ($99; CTSH) enjoys improving global demand, as its outsourcing capabilities quench clients' thirst to keep profit margins high. Companies preparing for the new health-insurance exchanges have sought out Cognizant's consulting and technological expertise within the health-care industry. The company has also seen banks boost their spending on compliance with new regulations. In November, management said initial talks with clients about 2014 point to moderate increases in spending budgets.

The stock has rallied 36% in the past year, consistently impressing analysts with its quarterly results and outlook. In addition, comprehensive immigration reform now seems less likely to be signed into law than it appeared this summer.

Four of six Quadrix category scores top 90, supporting Cognizant's Overall rank of 96, and both sector-specific scores exceed 95. Cognizant is a Focus List Buy and a Long-Term Buy.

Business breakdown

Cognizant managed to grow sales, net income, and operating cash flow throughout the recession. All three metrics have annualized 10-year growth rates of at least 34% and have risen by double digits each year in the past decade. Free cash flow jumped 31% to $1.00 billion in the 12 months ended September. Cognizant kept most of that cash on its balance sheet, which now contains $3.36 billion of cash ($11 per share) with no debt.

Business in North America (78% of revenue for the nine months ended September) consistently delivers double-digit sales growth. Europe (18% of revenue) has rebounded, with sales up 32% over first nine months of 2013.

One of the top applicants for U.S. green cards, Cognizant has taken some heat from lawmakers' effort to restrict work visas. In June, the U.S. Senate approved sweeping immigration reform that would increase costs for the visas Cognizant uses for temporary, highly skilled workers. However, the House has ignored the measure, preferring to adopt smaller bills. About 29,000 of Cognizant's 166,400 employees live in the U.S., with an estimated 65% of those U.S. workers relying on visas or work permits.

In December, Cognizant said it will hire at least 10,000 more U.S. workers over the next three years. The announcement serves as a political gesture, a hedge against the lingering threat of reform. The new hires are also a statement of confidence that Cognizant can charge clients higher prices, given that U.S. workers would command higher salaries.

Conclusion

The consensus anticipates Cognizant growing per-share earnings 18% in 2014, twice its peer group's projected average of 9% growth for the upcoming fiscal year. Analyst estimates for Cognizant have risen in the past 30 days, while many of its peers have seen targets decline. Management will disclose its own guidance in February.

At 24 times trailing earnings, Cognizant shares trade in line with both their three-year average and the average for S&P 1500 technology consulting and services stocks. An annual report for Cognizant Technology Solutions Corp. is available at 500 Frank W. Burr Blvd., Teaneck, NJ 07666; (201) 801-0233; www.cognizant.com.

COGNIZANT TECHNOLOGY SOLUTIONS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '13
1.13
vs.
0.98
22%
84.17
-
63.14
21 - 16
Jun '13
1.07
vs.
0.89
20%
77.89
-
60.92
20 - 16
Mar '13
1.02
vs.
0.88
18%
81.08
-
74.03
22 - 20
Dec '12
0.99
vs.
0.84
17%
74.87
-
64.20
21 - 18
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
7.35
3.70
0.00
78.00
-
53.92
21 - 15
2011
6.12
3.07
0.00
83.48
-
53.54
27 - 17
2010
4.59
2.51
0.00
74.79
-
42.08
30 - 17
2009
3.28
1.90
0.00
46.61
-
17.26
25 - 9
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
92
49
98
93
92
82

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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