Cognizant off site, but not out of mind

12/29/2008


  Recent Price
$17
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
12
  Shares (millions)
300
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$37.10 - $14.38

Cognizant Technology Solutions ($17; NASDAQ: CTSH) started as an in-house technology-development center for Dun & Bradstreet ($72; NYSE: DNB). Based in New Jersey, Cognizant operates mostly in India, a country with a highly educated and low-cost work force.

The company develops custom software applications and manages computer systems. Competitors include IBM ($82; NYSE: IBM) and Accenture ($32; NYSE: ACN), its top rival for outsourcing deals.

Cognizant enjoyed an excellent year in 2008, despite its exposure to financial services. Per-share earnings are expected to increase 26% this year and 12% in 2009. Cognizant is a Buy and a Long-Term Buy.

Cloudy business outlook
Fears of sharp cuts in technology budgets have helped drive down Wall Street’s profit expectations for Cognizant. However, a balance sheet with $595 million in cash and no long-term debt positions the company to survive in lean times. Cognizant has enough cash to cover more than a year of operating expenses.

Cognizant generates most of its revenue from customers in the financial-services (47%) and health-care (24%) sectors. As the dominant vendor for companies on both sides of recent financial mergers, Cognizant has avoided taking a big hit from the wave of consolidation. But the firm could lose some business in the year ahead if its luck doesn’t hold.

Visibility regarding corporate technology budgets remains low, but many analysts expect a decline of 10% to 20% in the financial-services sector. Pricing has become more competitive in terms of customers seeking less-expensive services, but Cognizant says it hasn’t seen any of the top players lower their rates. For its part, Cognizant has kept prices steady, only offering discounts when customers agree to boost the project volume.

Cognizant has lost only one major client to pricing issues in 2008,
thanks largely to its flexible product mix. Many contracts contain a blend of expensive on-site services and cheaper off-site options. To satisfy customers struggling to meet their budgets, Cognizant can offer a higher percentage of cheaper off-site services rather than lowering its rates. Such a trend could slow revenue growth, but the company says it would not affect profit margins, as off-site costs are low.

The company has experienced very few cancellations. Project delays are a greater concern, but expansion into Europe could offset the effects of the American recession.

Conclusion
In December, Cognizant announced plans to buy back up to $50 million in stock over the next 12 months, representing about 1% of shares outstanding. The stock has dipped 30% over the last three months and is attractively valued at 11 times estimated year-ahead earnings.

The strong dollar could weigh on profits. But even the lowest analyst estimate projects not doom, but flat earnings growth in 2009. Both the consensus estimate and the stock price seem to discount a fair amount of bad news, and Cognizant seems capable of exceeding expectations. An annual report for Cognizant Technology Solutions Corp. is available at Glenpointe Centre West, 500 Frank W. Burr Blvd., Teaneck, NJ 07666; (201) 801-0233; www.cognizant.com.


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