Barron’s on Cognizant

Barron’s highlights the Cognizant Technology Solutions (CTSH) shift to digital consulting. Five years ago, it was barely a speck within CTSH’s business, but today, digital consulting accounts for 25% of their revenue. Cognizant has been having a very good year.

Last year, revenue rose 8.6%, the smallest increase ever, and net income fell 4%, to $1.6 billion, or $3.39 a share, as certain health-care clients postponed spending due to merger-related activity. This year, things are going better; Cognizant beat estimates in the first and second quarters, as client spending resumed. Full-year earnings are expected to rise more than 30%, to $2 billion, or $3.71 a share, fueled by profit-margin expansion and stock buybacks, on a 10% jump in revenue, to $14.8 billion.

The stock still isn’t expensive.

Even after the stock’s latest rally, shares trade for 17 times next year’s expected earnings, below their five-year average of 17.5 and at a steeper-than-usual discount to rival Accenture (ACN), which sports a price/earnings ratio of 19. “They are running and chewing gum at the same time by trying to grow their digital business and improve margins,” says Lisa Ellis, a senior analyst at Bernstein, who says the market is skeptical, given the stock’s depressed P/E. “I see this as a straightforward execution story over the next several quarters. They have talked about their plans with a high level of specificity.”

Ellis thinks Cognizant’s stock could hit $84 in the next year, 15% above last week’s level, based on her view that earnings will grow at a midteens rate in the near term, helped by margin improvement. Additionally, large banks could begin spending on technology again after years on the sidelines, and clients could speed the growth of their digital businesses. In that case, Cognizant’s shares could earn a higher multiple. Ellis has above-consensus earnings estimates of $4.52 a share for next year and $5.33 for 2019.

Posted by on October 9th, 2017 at 3:38 pm

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