ModernGraham Valuation of Cognizant Technology Solutions

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Jul 17, 2015

Cognizant Technology Solutions Corp (

CTSH, Financial) has shown consistent earnings growth over the last few years which may garner some attention from prospective investors; however, Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits.

The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative defensive investor or the less conservative enterprising investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using the ModernGraham method, one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries.


Defensive Investor – Must pass at least six of the following seven tests: Score = 4/7

  1. Adequate Size of Enterprise – Market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – Current ratio greater than 2 – PASS
  3. Earnings Stability – Positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – Has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – Earnings per share has increased by at least one-third over the last 10 years, using three-year averages at the beginning and end of the period – PASS
  6. Moderate PEmg (price over normalized earnings) Ratio – PEmg is less than 20 – FAIL
  7. Moderate Price-to-Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – Must pass at least 4 of the following 5 tests to be suitable for a Defensive Investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – Current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt-to-Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – Positive earnings per share for at least 5 years – PASS
  4. Dividend Record – Currently pays a dividend – FAIL
  5. Earnings Growth – EPSmg greater than that 5 years ago – PASS

Valuation summary

Key data

Recent Price $60.85
MG Value $89.78
MG Opinion Undervalued
Value Based on 3% Growth $33.81
Value Based on 0% Growth $19.82
Market Implied Growth Rate 8.80%
Net Current Asset Value (NCAV) $5.22
PEmg 26.09
Current Ratio 3.40
PB Ratio 4.57

Balance Sheet - March 2015

Current Assets $6,407,000,000
Current Liabilities $1,884,000,000
Total Debt $925,000,000
Total Assets $11,383,000,000
Intangible Assets $3,332,000,000
Total Liabilities $3,205,000,000
Outstanding Shares 613,900,000

Earnings Per Share

2015 (estimate) $2.93
2014 $2.35
2013 $2.02
2012 $1.72
2011 $1.43
2010 $1.19
2009 $0.89
2008 $0.72
2007 $0.58
2006 $0.39
2005 $0.28

Earnings Per Share - ModernGraham

2015 (estimate) $2.33
2014 $1.94
2013 $1.64
2012 $1.36
2011 $1.11
2010 $0.88

Dividend History

Cognizant Technology Solutions does not pay a dividend.


Cognizant Technology Solutions passes the initial requirements of the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the lack of dividends, as well as the high PEmg and PB ratio. The Enterprising Investor is only initially concerned by the lack of dividends. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.

When it comes to that valuation, it is critical to consider the company's earnings history. In this case, it has grown its EPSmg (normalized earnings) from $1.11 in 2011 to an estimated $2.33 for 2015. This level of demonstrated growth outpaces the market's implied estimate for annual earnings growth of 8.8% over the next 7-10 years.

In recent years, the company's actual growth in EPSmg has averaged around 22% annually. The ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate but still returns an estimate of intrinsic value well above the current price, indicating that Cognizant Technology Solutions is undervalued at the present time.

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