Cognizant Going Strong – Analyst Blog

Following the release of strong results in the fourth quarter 2009, estimates for Cognizant Technology Solutions Corporation (CTSH) have been on the rise.

 

Headquartered in Teaneck, New Jersey, Cognizant is a leading provider of custom information technology to Fortune 1000 customers.

 

Cognizant posted a 20% year-over-year top-line growth and a 6% sequential growth in the fourth quarter. Operating margin of 19.9% was within management’s targeted range of 19% – 20%.

 

Earnings per share (EPS) came in at 50 cents compared to 41 cents in the year-ago quarter and beat the Zacks Consensus Estimate of 46 cents.

 

Despite the global slowdown, Cognizant continues to deliver strong results. For 2009, the company reported revenues of $3.279 billion, up 16% from a year ago.

 

Both during the fourth quarter and the full year, growth was broad based with strength across services and industries.

 

 

In addition, management provided a strong guidance. The company expects to generate revenues of at least $935 million in the first quarter of fiscal 2010. This guidance includes a negative sequential impact of about $5 million in revenue due to the recent depreciation of the European currencies.

 

On the conference call, management stated that newer services like infrastructure management and BPO/ KPO have now achieved critical mass and present significant opportunities of growth. Cognizant recently acquired UBS India Service Center to expand its KPO, BPO and IT infrastructure services capabilities.

 

In 2009, Cognizant strengthened its product portfolio through other acquisitions and strategic relationships.

 

Cognizant launched a new service offering in the area of engineering and manufacturing solutions through its relationship with Invensys. Management expects that this relationship will open up an entirely new market, which will help the company expand into core engineering, manufacturing and industrial automation solutions and penetrate industries such as chemical and petrochemical companies in the process manufacturing space.

 

Cognizant also acquired Active Intelligence, a systems integration company specializing in Oracle retail solutions portfolio, which will solidify its position in the retail space.

 

The company also entered into a strategic partnership with Temenos, a market leader in core banking systems, which add to the breadth and depth of its capabilities in banking and financial services technology and operations. With the acquisition of Pepperweed Advisors, Cognizant strengthened its IT infrastructure services.

 

The global economic scenario is showing signs of recovery and the business environment has become much stable compared to year-end 2009. IT spending is expected to get a boost in 2010 and Cognizant expects to win significant business.

 

Though there is an element of uncertainty about the level of the new normal economic activity in key markets, Cognizant believes “offshoring” as a proportion of IT budgets will increase compared to 2009.

 

For full year 2010, based on current conditions and client indications, Cognizant expects revenues of at least $3.935 billion, a growth of 20%.

 

Management remains cautious for the second half of 2010 until budgets are firmly locked and visibility improves.

 

 

The solid performance in 2009 and positive guidance for 2010 resulted in several analysts following the stock revise their estimates for the company. Over the past 30 days, 14 of the 21 analysts following the stock have raised their earnings estimates for fiscal 2010 with only 2 analysts moving in the opposite direction.

 

Overall, 2010 estimates are down 5 cents with the current Zacks Consensus Estimate being $2.06, higher than management’s guidance of $2.03. Considering Cognizant’s previous track record, we believe the company is well-positioned to beat its guidance.

 

In terms of earnings surprises, earnings exceeded the Zacks Consensus Estimate in each of the last four quarters, with a four-quarter average of 10.42%.

 

Earnings are also on the rise for fiscal 2011, with 5 of the analysts following the stock raising their estimates over the last 30 days with one downward revision. On balance, 2011 earnings estimates have gone up by 3 cents with the current Zacks Consensus Estimate being $2.29.

 

Meanwhile, we note that 12 of the 21 analysts covering the stock have raised their earnings estimates for the first quarter of fiscal 2010 over the past 30 days, with no downward revision. Cognizant expects to earn 48 cents in the first quarter, in line with the current Zacks Consensus Estimate.

 

The guidance provided by management anticipates a first quarter share count of approximately 304.7 million shares and a tax rate of 16.8%. This guidance excludes any non-operating foreign exchange gains or losses.

 

The current Zacks Consensus Estimate for the second quarter of 2010 stands at 50 cents, with an upside potential of 2%.

 

 

Cognizant remains well diversified among verticals such as financial services, health care and life sciences, retail, manufacturing and logistics. This diversification has helped the company maintain its top line even in this tough economic climate.

 

Cognizant has consistently delivered solid results maintaining both top and bottom lines. Given the early signs of economic recovery, we expect growth to accelerate in the coming quarters. Our long-term recommendation for Cognizant is NEUTRAL.