Peter Lynch is a legendary investor who ran the Magellan Fund at Fidelity Investments between 1977 and 1990. During his 13-year tenure, he racked up an incredible compounded annual return of 29.2%.
Lynch’s primary strategy focuses on looking for growth at a reasonable price, or GARP, stocks. He believes the average person can beat the market by tapping into their own unique insights.
In this discussion, I am going to break down two stocks that have shown up on GuruFocus' Peter Lynch Growth With Lower Valuation screener. Let's dive in.
Evertec
First is Evertec Inc. (EVTC, Financial), a leading fintech company that specializes in electronic transactions. Its three main areas of operation include merchant acquiring, payment processing and business payments. Headquartered in San Juan, Puerto Rico, the company owns the largest debit network in the Caribbean.
Evertec operates at an immense scale with over 6 billion transactions processed each year across 26 countries and 80,000 point-of-sale terminals.
Strong financials
Evertec reported strong financial results for the first quarter of 2023. Its revenue of $159.8 million beat analysts' forecasts by $7.66 million and rose by 6.37% year over year.
The results were driven by solid growth in its merchant acquiring segment, which increased its revenue by 13% year over year, driven by a favorable mix of cards and pricing packages. Its payments in Puerto Rico also rose by 21% year over year, with point-of-sale processing as transactions up 11%.
Revenue for the business solutions segment fell by 11% year over year due to the sale of some assets to Popular Inc. (BPOP, Financial). As such, this dip in revenue is not exactly bad as Evertec will receive the benefit, which is valued at around $196 million.
Evertec’s core fintech business is also influenced by the macro environment in Puerto Rico, which impacts payments volume. In this case, economic data shows signs of stabilization. The unemployment rate has remained at 6%, which is the lowest level in decades. Further, the travel sector has shown signs of a recovery, with airline passengers up 9.3% year over year.
Moving on to profitability, Evertec reported earnings of 46 cents per share, which topped forecasts by 2 cents. This was despite operating income declining by around 13% year over year to $40.1 million.
Adjusted Ebitda was $67 million, which was down 6% year over year. However, the adjusted Ebitda margin was a solid 42%, which aligned with management's forecast.
The company offers a forward dividend yield of 0.55%, which is well covered by the $55 million in operating cash flow.
The overall liquidity on its balance sheet is $368 million, which includes cash, short-term investments and accounts receivable. Its total debt is minimal at $421.7 million.
Valuation
Evertec trades with a price-sales ratio of around 4, which is 22% cheaper than its five-year average.
The price-earnings ratio of 19 is about 13% cheaper than its five-year average based on my calculations.
Further, the GF Value Line indicates a fair value of $49 based on historical ratios, past financial performance and analysts' future earnings projections. As such, the stock is modestly undervalued at the time of writing.
Cognizant
Next is Cognizant Technology Solutions Corp. (CTSH, Financial), an IT consulting company that helps businesses to digitally transform via software engineering and the cloud. This has been accomplished for a range of clients across many sectors.
For example, in the first quarter, the company announced a five-year agreement with Nike (NKE, Financial) to transform its technology operations. This includes improving self-service capabilities and productivity to ultimately drive cost savings.
The company also announced a deal with Australian airline Jetstar. Cognizant aims to transform Jetsar to the AWS cloud and generate personalized travel recommendations for its customers.
Solid financials
Cognizant reported solid financial results for the first quarter. Its revenue of $4.8 billion declined 0.28% year over year, but still beat analysts' forecasts by $79 million.
Its trailing 12-month bookings rose by 28% year over year to $25.6 billion, while the total headcount stood at a staggering 351,500 people.
A notable project win for the quarter included a successful cloud migration for Guidewire (GWRE, Financial), an insurance company that moved its claims processing to the cloud to increase efficiency.
The company also launched a data intelligence toolkit for Snowflake’s (SNOW, Financial) telecom data cloud. This is a great strategy as it will enable Cognizant to benefit from the cloud software company's rapid growth and the ongoing digital transformation of the legacy telecom business.
Moving on, Cognizant reported $1.14 in earnings per share, which topped forecasts by 10 cents. Its operating income of $714 million was fairly stable, declining just 1.74% year over year.
A positive is Cognizant has announced the launch of its “NextGen program.” The initiative aims to simplify the company’s operating model by consolidating office space and optimizing operations.
In the short term, this will result in costs of around $400 million, with approximately $200 million resulting from employee severance. However, by 2025 its overall real estate costs alone are expected to be reduced by $100 million.
Cognizant has a solid balance sheet with $2.48 billion in cash and short-term investments. In addition, the company reported total debt of $1.5 billion, which is well covered.
The business also offers a forward dividend yield of 1.84% and bought back $200 million worth of shares in the first quarter, which is a positive sign.
Valuation
Cognizant trades with a price-earnings ratio of 15, which is 15% cheaper than its five-year average.
The price-sales ratio of 1.67 is around 22% cheaper than its average over the same period.
The GF Value Line indicates Cognizant has a fair value of $85 per share. Thus, the stock is modestly undervalued at the time of writing.
Final thoughts
Lynch was an incredible investor and his focus on growth at a reasonable price makes a lot of sense. Both Evertec and Cognizant have the characteristics of a GARP stock. They are trading at fairly cheap valuations, but also offer growth prospects due to the tailwinds across fintech in emerging markets (Evercore) and the cloud (Cognizant).
