Why Are So Many Gurus Buying C


Cognizant Technology Solutions Corp. (CTSH, Financial) is a large information technology services company based in New Jersey with a large technical workforce in India. The company caught my attention due to high guru buying in the second quarter. During the three month period ended June 30, 13 gurus bought the stock while only one sold shares.

The company is a leading provider of full lifecycle e-business and application development projects, taking full responsibility for the management of a client’s software systems and helping clients drive legacy transformation projects to completion. Cognizant is particularly strong in industries like healthcare and financial services.

segments

revenues

report date

12/31/2021

12/31/2020

12/31/2019

currency

USD

USD

USD

scale

thousands

thousands

thousands

financial services

6,051,000

5,621,000

5,869,000

healthcare

5,337,000

4,852,000

4,695,000

Products & Resources

4,276,000

3,696,000

3,770,000

Communication, Media & Technology

2,843,000

2,483,000

2,449,000

In total

18,507,000

16,652,000

16,783,000

Cognizant operates under two broad service lines: Consulting and Technology Services and Outsourcing.

The company’s solutions include application development and integration, application management and reengineering services.

Application development services are delivered using a full lifecycle application development approach, where the company assumes all responsibility and accountability for the analysis, design, implementation, testing and integration of systems, or through collaborative development involving the Cognizant staff the customer’s internal IT staff collaborate. In each case, on-site company team members work closely with end users to develop specifications and define requirements.

Cognizant’s application management services aim to ensure that a client’s core operating systems are healthy and responsive to the changing needs of end users. The company is often able to introduce product and process improvements and improve service levels.

Through its reengineering services, the company works with clients to migrate systems based on legacy computing environments to newer, open systems platforms and client/server architectures, often in response to the more stringent requirements of the E -Business.

According to Morningstar, the company has a narrow moat given its longstanding client relationships and the mission-critical expertise it brings to the table. Many large IT projects take many years to complete, and the company’s consultants work closely with clients’ internal staff over long periods of time, resulting in a deep understanding of the business and building relationships that are difficult to replace.

Geographic Analysis

revenues

report date

12/31/2021

currency

USD

scale

thousands

North America

13,636,000

United Kingdom

1,642,000

continental europe

1,919,000

rest of the world

1,310,000

In total

18,507,000

While Cognizant’s revenue-per-share growth has been in the mid-teens over the past 10 years, it has slowed to a mid-single-digit range in recent years. Slowing growth, along with some erosion of net income margins over the years, has resulted in some price-to-earnings compression, so Cognizant is now more of a value stock than a growth stock.

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The company has an excellent balance sheet with very little debt.

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The company produces consistent and high quality cash flows. Core cash flow (free cash flow excluding changes in working capital and minus stock-based compensation), as represented by the orange line, is growing in the high single digits. Core cash flow growth has been very strong over the last four years, at a compound annual growth rate of well over 15%.

1571180543800885248.png

valuation

The GF Value Line shows the stock as moderately undervalued based on historical metrics, past financial results and future analyst earnings forecasts. The stock is down about 33% since its peak.

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GF value is around $85 which I think is right. Morningstar gives a more generous fair value of $96 per share, while CFRA has a 12-month target of $81 and a buy rating.

The GF score is excellent at 95 out of 100, indicating that Cognizant has high outperformance potential.

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As the table below shows, Cognizant’s rating compares favorably to a number of global IT service providers. Price-to-operating cash flow and free cash flow are among the lowest, as is its enterprise value-to-Ebitda ratio.

Exchange

symbol

company

current price

Market Cap (USD million)

Forward PE Ratio

Price-to-Free Cash Flow

Price to Operation Cash Flow

dividend yield %

EV to EBITDA

NAS

CTSH

Cognizant Technology Solutions Corp

62.20

$32,206

12.69

13.99

12.51

1.69

8.87

NYSE

IT

Gartner Inc

300.08

$23,734

0.00

22.37

20.96

0.00

21.78

NYSE

LDOS

Leidos Holdings Inc

93.29

$12,738

04/13

16.72

14.75

1.54

12.55

NYSE

WORLDWIDE

Global SA

209.02

$8,732

0.00

89.97

50.92

0.00

49.46

NYSE

G

Genpact Ltd

44.97

$8,251

0.00

22.72

19.45

1.07

14.63

NYSE

ACN

Accenture PLC

272.68

$172,483

22.52

23.61

21.37

1.42

15.40

NSE

TKS

Tata Consulting Services Ltd

3008.70

$138,216

26.18

30.11

27.84

1.46

18.31

NSE

INFY

Infosys Ltd

1377.05

$72,510

04/24

26.82

24.18

2.25

16.32

NSE

HCLTECH

HCL Technologies Ltd

896.90

$30,557

17.12

58.28

46.60

5.35

10.92

XPAR

LID

Capgemini SE

166.25

$28,390

14.47

14.11

12.17

1.44

11.82

parts list

507685

Wipro Ltd

401.85

$27,605

18.25

37.56

27.88

1.49

11.38

17.40

Average

Conclusion

Given the strong interest in the name from guru investors and the apparent undervaluation, Cognizant deserves serious consideration.

The company is well run and has strong cash flow generation. While Cognizant’s growth has slowed in recent years, it should continue growing in the mid-single digits. The company operates in a highly competitive industry and faces some key risks, particularly in talent and recruitment, given the shortage of IT staff.

On the other hand, the overall IT services market continues to grow, with market research firm IDC estimating that global services spending will grow at approximately 4.4% CAGR between 2018 and 2022, reaching $1.2 trillion. Global IT outsourcing spending is expected to grow 3.1% annually over the same period. Business consulting and IT business process services revenues are expected to increase by 8.7% and 4.7%, respectively.

Cognizant seems to be growing faster than the overall market, so it could be considered a good company at a fair price.



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