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Cognizant - Investors Should Look Elsewhere

January 26, 2012 | About:
Cognizant (CTSH) hasn’t had a great year, as it is down about 3% over the past year versus gains for the S&P 500. The reason may be because various valuation metrics suggest that the stock is fairly valued at these prices. Therefore, it may not be a good bet here for further upside and it may be wise for investors to look elsewhere.

Cognizant’s trailing five-year valuation metrics suggest that the stock is fairly valued and they are all very close to their respective five-year averages. Cognizant’s current P/B ratio is 5.5 and it has averaged 5.6 over the past 5 years with a high of 10.5 and low of 2.7. Cognizant’s current P/S ratio is 3.8 and it has averaged 4.1 over the past five years with a high of 7.9 and low of 1.9. The stock’s P/E ratio is 26.3 and it has averaged 26.8 over the past five years with a high of 51.3 and low of 12.5.

On a forward P/E multiple, there is a similar conclusion. The stock is currently trading at about $72 a share with analysts expecting the company to report EPS of $3.41 next year for a forward P/E of 21. Revenues are expected to jump 22%. According to Yahoo Finance, competitors include Wipro Limited (WIT) and Infosys (INFY). Wipro is trading at $11 a share with analysts expecting EPS of $0.55 next year for a forward P/E multiple of 20. Revenues are expected to increase 13%. Infosys is trading at $54 a share with analysts expecting EPS of $3.28 next year for a forward P/E multiple of 16. Revenues are expected to grow 13%. Cognizant is trading at about fair value as although it has a bigger forward multiple; it also has higher growth rates than the other competitors.

On a cash flow basis, according to the Dividend Kings Fair Value metric, the stock is fairly valued as the website suggests that the stock is worth $75 a share versus its current $72 price.

Analysts also agree that the stock is fairly valued. The consensus price target for the analysts who follow Cognizant is $85. That is upside of 18%, pretty average for analyst targets.

Analysts have some credibility here as they have done a good job forecasting the company’s quarterly results.Cognizant has beat earnings estimates the past 4 quarters but the margins have been slim. The margins have ranged between 1-4 cents or about 2-6% from consensus estimates.

The stock has had a mixed year, starting it out at about $74 a share, rising to over $82 a share before falling below $55 a share in August and bouncing back to trade between the $60-$78 level. The stock sits above its 50 day moving average, which is at $67, and above its 200 day moving average with is at $70. Resistance on the upside includes its current $72 level followed by $78, its 6 month high. On the downside, the $62 level followed by the $60 level should provide solid entry points for the stock.

About the author:

Doug Ehrman
Buy low and sell high is easier in theory than in practice– and that’s where we come in.

At Investment Underground, our editors are disciplined, independent thinkers who will inform you when to buy undervalued investments, recognize catalysts, and sell when full value is realized. We provide timely, detailed analysis of our value investing strategies and help you achieve your goals of a reduced-risk trading environment.

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