Cognizant Has Further To Fly


  Recent Price


  P/E Ratio
  Shares (millions)
  Long-Term Debt as % of Capital
  52-Week Price Range
$48.95 - $17.26

Shares of consultant and outsourcer Cognizant Technology Solutions ($46; CTSH) fell in sympathy after computer giant IBM ($126; IBM) reported solid overall earnings but weaker-than-expected results in services. However, while Cognizant uses the same bait as IBM, it fishes in a different pool. The very trends that hurt IBM — including a move toward smaller deals and a reluctance to spend on elaborate and pricey consulting options — could benefit Cognizant, a smaller rival with a strong presence in India.

Cognizant shares have jumped 164% from March lows, versus 78% for the S&P 1500 Technology Sector Index. While the stock is no longer cheap, Cognizant’s robust operating momentum sets it apart, a trend we expect to continue. Consensus estimates project revenue growth of 18% in the December quarter and nearly 20% in 2010. Per-share profits were expected to climb 21% for the quarter and 14% for the year, targets that could prove conservative. Cognizant is a Focus List Buy and a Long-Term Buy.

Attractive niche

In the December quarter, IBM’s services revenue fell 5% in constant currency, spooking investors who sold off Cognizant and other consultants. But lost in the knee-jerk reaction was the fact that IBM’s outsourcing business showed strength.

Corporate technology departments are emphasizing cost reduction in 2010, with a recent survey finding little demand for expansion of computer systems but plenty of interest in consolidating or boosting productivity from existing systems. Such a trend should benefit low-cost outsourcers like Cognizant, which relies heavily on India’s labor force.

Earlier this month, two Indian consulting and outsourcing companies reported excellent revenue growth for the December quarter. These results appear to back up claims by some industry watchers that while big projects are scarce, smaller deals are getting done.

Demand seems particularly strong from financial-services companies, which accounted for 43% of Cognizant’s revenue in the nine months ended September. The next-largest revenue sources are health care (26%) and manufacturing/retail/logistics (17%). While December-quarter expectations call for strong growth, Cognizant seems capable of topping them when it releases results Feb. 9.

At 27 times estimated trailing earnings, Cognizant trades roughly in line with its three-year average valuation and 55% above the average for the eight largest U.S.-traded technology consultants.

However, Cognizant has earned a premium valuation by delivering outsized growth. In the 12 months ended September, Cognizant managed sales growth of 17% and per-share-profit growth of 20%, versus an average of 2% sales growth and 9% profit growth for the largest consultants.


Sales growth in particular could be hard to find this year, and if Cognizant keeps growing the top line, it should be able to sustain an above-market P/E multiple. Cognizant will announce December-quarter results Feb. 9. An annual report for Cognizant Technology Solutions Corp. can be obtained at 500 Frank W. Burr Blvd., Teaneck, NJ 07666; (201) 801-0233;




      Price Range

P/E Ratio

Sep '09 $0.45 vs. $0.38 + 16% $39.40 -


25 - 16
Jun '09 0.47 vs. 0.35 + 13% 27.90 - 20.35 19 - 14
Mar '09 0.38 vs. 0.34 + 16% 22.18 - 17.26 15 - 12
Dec '08 0.37 vs.


+ 26% 22.69 - 14.38 16 - 10



52-Week Price Range

P/E Ratio

2008 $2.82 $1.44 $0.00 $37.10
$14.38 26 - 10
2007 $2.14 $1.16 $0.00 47.78
29.44 41 - 25
2006 $1.42 $0.78 $0.00 41.24
24.25 53 - 31
2005 $0.89 $0.53 $0.00 26.24
17.78 50 - 34
————————————————— Quadrix Scores † —————————————————
Overall Momen-
Value Quality Financial
95 94 42 99 98 60 85

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

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