Analysts' Choice: Cognizant Charts Clear Growth Path

10/9/2017


  Recent Price
$73
  Dividend
$0.60
  Yield
0.8%
  P/E Ratio
21
  Shares (millions)
591
  Long-Term Debt As % Of Capital
7%
  52-Week Price Range
$73.28 - $49.35

Up 30% in 2017, Cognizant Technology Solutions ($73; CTSH) shares have outpaced the technology sector's 26% advance and the broad S&P 1500 Index's 13% gain. Even amid the technology sector's struggles since August, Cognizant shares have risen 3%.

Despite the recent rally and rising analyst estimates, we still see upside for the stock. A provider of technology services, Cognizant boasts a superior growth profile and lower valuation than its peer group. With an Overall score of 97, Cognizant is a Buy and a Long-Term Buy.

Business breakdown

Consulting services generate about 58% of Cognizant's revenue, with the remainder coming from outsourcing. In the 12 months ended June, Cognizant's per-share profits climbed 8% on 9% higher revenue. Technology consultants and services stocks in the S&P 1500 Index averaged 7% lower profits in the past year.

Cognizant is delivering solid operating momentum, despite slower sales from its largest two segments. Financial services (39% of total revenue for the 12 months ended June) has grown sales 5% in the past year, while health care (29%) has posted 8% growth. The products and resources unit (20%), which encompasses retail, consumer goods, manufacturing, logistics, travel, energy, and utilities, has grown sales 14% in the past year. The communications, media, and technology unit (12%) has delivered 15% sales growth.

Cognizant has used a handful of midsized deals to complement organic growth, particularly for its health-care business. In 2014, it paid $2.7 billion for TriZetto, which processes claims and runs call centers. In August, the company acquired TMG Health, which offers processing services for Medicare providers.

Because of potential efforts to crack down on immigration, Cognizant is hiring more U.S. workers, while reducing its number of U.S. visa applications for foreign workers this year — two moves expected to squeeze profit margins. Yet in August, Cognizant raised the midpoint of its 2017 revenue target, now implying 9% growth. That guidance could prove conservative because it excludes any revenue from the TMG Health deal. It also assumes no improvement in Cognizant's banking end market.

Over the next 12-month period, Cognizant is expected to grow per-share profits 15%, versus its industry average of 8%. Unlike most companies in its industry, Cognizant's profit estimates have crept higher in the past 60 days.

Conclusion

The stock trades at a reasonable 21 times trailing earnings, below its five-year average of 22 and industry average of 24. At 18 times estimated year-ahead profits, Cognizant shares offer a 15% discount to its peer group.

In February, management initiated a dividend, paying $0.15 per share, and announced plans to repurchase up to $2.7 billion of stock through 2018. Starting in 2009, Cognizant expects to devote 75% of free cash flow to dividends and stock buybacks.

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.

COGNIZANT TECHNOLOGY SOLUTIONS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '17
0.93
vs.
0.87
9%
68.18
-
57.50
20 - 17
Mar '17
0.84
vs.
0.80
11%
60.39
-
51.52
18 - 15
Dec '16
0.87
vs.
0.80
7%
58.50
-
48.50
18 - 15
Sep '16
0.86
vs.
0.76
8%
60.47
-
45.44
19 - 14
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
13.49
3.39
0.00
63.43
-
45.44
19 - 13
2015
12.42
3.07
0.00
69.80
-
50.71
23 - 17
2014
10.26
2.61
0.00
54.89
-
41.51
21 - 16
2013
8.84
2.02
0.00
50.56
-
30.46
25 - 15
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
88
61
96
78
98
78

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


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com