Recession Can't Stop Cognizant


  Recent Price


  P/E Ratio
  Shares (millions)
  Long-Term Debt as % of Capital
  52-Week Price Range
$32.36 - $14.38

Added to the Focus List in the June 15 issue of the Forecasts, consultant and outsourcer Cognizant Technology Solutions ($26; CTSH) has demonstrated an ability to grow faster than most peers. Management says it is gaining market share at the expense of smaller competitors without undercutting its own prices.

Cognizant has so far hurdled the recession’s trough, extending its 28-quarter string of double-digit growth in sales and profits through the March quarter. While those streaks are likely to end this year, both sales and profits should continue to rise. Wall Street expects per-share-profit growth of 7% in 2009 and 8% in 2010, numbers Cognizant may be able to exceed if the business environment improves later this year. Cognizant is a Focus List Buy and a Long-Term Buy.

Business breakdown

Cognizant, which designs software and manages computer systems, serves a variety of industries. The three largest revenue sources are financial services (45% of sales in the last 12 months); health care (25%); and manufacturing, retail, and logistics (16%). Despite weakness in financial services, Cognizant managed 16% sales growth in the March quarter. While much of Cognizant’s work is performed off-site in markets with low operating costs, about 80% of revenue comes from clients in North America, with another 18% from Europe.

Fixed-price contracts generate nearly 30% of total sales. For its other contracts, Cognizant will work with distressed clients to arrange a more affordable product mix — generally dropping more expensive on-site services in favor of cheaper off-site options. That practice has helped keep prices steady despite the recession. In some cases, Cognizant has shuffled its product mix in exchange for earlier payments or higher-volume contracts.

If necessary, Cognizant has the capacity to migrate even more of its work toward cheaper off-site alternatives, positioning the company to deal with continued economic weakness. Cognizant also enjoys steady cash-flow growth and has no long-term debt. That financial strength provides additional flexibility.

The outsourcing industry could stage a recovery by the end of the year, according to a survey conducted by Black Book of Outsourcing. At the onset, clients would likely favor projects that can be completed in less than six months and require minimal up-front costs.

India’s outsourcing reputation has apparently survived the demise of Satyam, an Indian firm caught cooking its books. The Black Book survey found that 94% of clients would consider outsourcing to India. Only the U.S. earned a higher approval rating. More than half of Cognizant’s employees work in India.

The company plans to expand in Europe and the Pacific Rim, where it sees opportunities to capture additional market share.


Cognizant’s steady operating momentum has not escaped Wall Street’s attention, and the stock is up 43% so far this year. Yet the shares trade at 17 times trailing earnings, 48% below the three-year average P/E ratio of 33. 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;





      Price Range

P/E Ratio

Mar '09 $0.38 vs. $0.34 + 16% $22.18 -


15 - 12
Dec '08 0.37 vs. 0.32 + 26% 22.69 - 14.38 16 - 10
Sep '08 0.38 vs. 0.32 + 31% 32.53 - 20.68 24 - 16
Jun '08 0.35 vs.


+ 33% 37.10 - 26.32 30 - 21



52-Week Price Range

P/E Ratio

2008 $2,816 $1.44 $0.00 $37.10
$14.38 26 - 10
2007 $2,136 $1.16 $0.00 47.78
29.44 41 - 25
2006 $1,424 $0.78 $0.00 41.24
24.25 53 - 31
2005 $886 $0.53 $0.00 26.24
17.78 50 - 34
————————————————— Quadrix Scores † —————————————————
Overall Momen-
Value Quality Financial
96 91 63 99 96 44 76

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

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