Why Are So Many Gurus Buying Cognizant?

13 gurus bought this IT services company last quarter

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Sep 18, 2022
Summary
  • This consensus guru investor pick exhibits excellent value.
  • Cognizant is good company at a fair price.
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Cognizant Technology Solutions Corp. (

CTSH, Financial) is a large information technolgy services company based in New Jersey that has a large technical workforce in India. The company caught my attention due to the high level of 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 life-cycle e-business and application development projects, taking full responsibility for management of a client’s software systems and helping clients move legacy transformation projects through to completion. Cognizant is especially strong in verticals such as health care 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

Communications, Media & Technology

2,843,000

2,483,000

2,449,000

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.

Applications development services are provided using a full life-cycle application development approach in which the company assumes total start to finish responsibility and accountability for analysis, design, implementation, testing and integration of systems, or through cooperative development, in which Cognizant employees work with the customer’s in-house IT personnel. In either case, the company’s onsite team members work closely with end-users to develop specifications and define requirements.

Cognizant's applications management services seek to ensure that a customer’s core operational systems are free of defects and responsive to end-users’ changing needs. The company is often able to introduce product and process enhancements and improve service levels.

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

According to Morningstar, the company has a narrow moat given its long-standing client relationships and the business-critical expertise it brings to the table. Many major IT projects last many years and the company's consultants work closely with the clients' in-house personnel over extended periods of time, resulting in deep understanding of the business and building relationships which will be hard 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 World

1,310,000

Total

18,507,000

While Cognizant's revenue per share growth over the past 10 years has been in the mid-teens, it has slowed to mid-single digits over the last few years. The slowing growth as well as some erosion in net profit margins over the years has led to some price-earnings compression, so Cognizant is now more of a value stock than a growth stock.

1571180539568832512.png

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

1571180542630674432.png

The company produces consistent and high-quality cash flows. Core cash flows (free cash flow without changes to working capital and less stock-based compensation) as represented by the orange line is growing in the high single digits. Growth of core cash flow has been very strong over the last four years at well over a 15% compound annual growth rate.

1571180543800885248.png

Valuation

The GF Value Line shows the stock to be moderately undervalued based on historical ratios, past financial performance and analysts' future earnings projections. The stock is down about 33% from its high.

1570518878906335232.png

The GF Value is approximately $85, which I think is accurate. Morningstar gives a more generous fair value of $96 a share, while CFRA has a 12-month target of $81 and a buy recommendation.

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

1570519278174715904.png

As the following table shows, Cognizant's valuation compares well against a set of global IT service providers. Its price-to-operating cash flow and free Cash flow is among the lowest, as it its enterprise value/Ebitda ratio.

Exchange

Symbol

Company

Current Price

Market Cap ($M)

Forward PE Ratio

Price-to-Free-Cash-Flow

Price-to-Operating-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

13.04

16.72

14.75

1.54

12.55

NYSE

GLOB

Globant 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

TCS

Tata Consultancy Services Ltd

3008.70

$138,216

26.18

30.11

27.84

1.46

18.31

NSE

INFY

Infosys Ltd

1377.05

$72,510

24.04

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

CAP

Capgemini SE

166.25

$28,390

14.47

14.11

12.17

1.44

11.82

BOM

507685

Wipro Ltd

401.85

$27,605

18.25

37.56

27.88

1.49

11.38

17.40

Average

Conclusion

Given the amount of guru investor interest in this name and the apparent undervaluation, Cognizant deserves serious consideration.

The company is well managed with strong cash flow generation. While Cognizant's growth has slowed in recent years, mid-single-digit growth should continue. It operates in a very competitive industry and faces some key risks, particularly in talent and recruiting given the shortage of IT personnel.

On the other hand, the overall IT services market continues to grow with market research firm IDC estimating overall worldwide services spending will rise at about a 4.4% CAGR between 2018 and 2022, reaching $1.2 trillion. Worldwide IT outsourcing spending is expected to rise 3.1% annually over the same period. Business consulting and IT business process services revenues are projected to expand 8.7% and 4.7%.

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

Disclosures

I/we have no positions in any stocks mentioned, and may buy the stocks mentioned or may initiate a short position in any of the stocks mentioned over the next 72 hours. Click for the complete disclosure
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