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A Top-Tier Growth Stock Again

Stock (Symbol) Stock Price

Cognizant Technology Solutions (CTSH)

$59

Data is as of Expected to Report Sector

August 12, 2010

Nov 1

Technology

Company Description
Cognizant Technology Solutions Corporation is a provider of custom information technology (IT) consulting and technology services, and outsourcing services. The Company’s customers are primarily Global 2000 companies located in North America, Europe and Asia. The Company’s competencies include Technology Consulting, Complex Systems Development and Integration, Enterprise Software Package Implementation and Maintenance, Data Warehousing, Business Intelligence and Analytics, Application Testing, Application Maintenance, Infrastructure Management, and Business and Knowledge Process Outsourcing (BPO and KPO). The Company operates in four segments: Financial Services, Healthcare, Manufacturing, Retail and Logistics, and Other, which includes Communications, Information, Media and Entertainment and High Technology. In May 2010, the Company acquired The PIPC Group.
Sharek’s Take
David SharekCognizant Technology Solutions’ revenue growth is back. Sales surged 42% last quarter (year-over-year) and the company thinks revenue growth will top 36% in 2010. With solid prospects ahead, I will purchase CTSH in the Growth Portfolio and Aggressive Growth Portfolio today.

I owned CTSH for mush of the past decade, and sold it in late 2008 as business slowed from the worldwide recession. CTSH’s results last quarter put the company back on the map as a top-tier growth stock. Pent-up demand is now flowing. This is a great stock to own again.

One-Year Chart
Looking at the one-year chart, its easy to think we missed the boat on getting into CTSH earlier. But a chart from two quarters ago shows CTSH wasn’t as attractive as it is now because profits were growing oh around 20% and the P/E was 25. Now, profit growth is expected to be 33% and 40% during the next two quarters and the P/E is about the same (26).
Profit Growth Earnings Table
CTSH has a steady revenue stream. This isn’t a chip or networking company that makes money only when it sells a product. Companies use CTSH to outsource daily tasks, which is why I’m excited about the 42% revenue growth last quarter — there should be more growth ahead. Profits were up 12% last quarter only because profits were abnormally high in the year-ago-period, thus the percentage profit growth was hampered.
Beat the Street
CTSH beat by 4 cents last quarter — but more importantly there’s a trend of quarterly estimates increasing. The Earnings Table (right) is shows many increases in quarterly estimates.
Annual Profit Estimates
Annual Profit Growth increased last quarter — especially 2011 figures. As long as annual estimates keep growing, CTSH should be a good if not great stock to own (as long as the P/E doesn’t get over 35). CTSH does have its profits affected by currency fluctuations.
Future Quarters
Quarterly estimates show solid prospects again. I also see big increases in the quarters ahead — CTSH is now on another level, its a top-tier growth stock again.
Fair Value
I think CTSH’s P/E could go to 30. CTSH isn’t a real bargain at this point, but continuing increases in annual estimates could push the company’s fair value up in future quarters.
Year Profits x P/E = Price Upside/Downside
Today $2.28 x 26 = $59  
2010 Fair Value 2.28 x 30 = 68 15%
2011 Fair Value 2.61 x 30 = 78 32%
Ten-Year Chart
CTSH was a former #1 holding of mine earlier in the decade. I sold CTSH on 12/26/08 as profit growth looked to slow to 12% the next two quarters. I noted “There is little doubt growth is slowing, and I think the financials will continue to suffer into 2009.”

The current ten-year chart shows profits continued to grow greater than 20% — thus I should have held this stock. Note Yearly EPS Growth is greater than Yearly Stock Growth. That’s a positive sign the stock still has some catching up to do.

Power Ranking Bottom Line
Growth Portfolio

6 of 18

I will repurchase Cognizant Technology Solutions today. CTSH will be the 6th best stock in both the 18 stock Growth Portfolio and the ten stock Aggressive Growth Portfolio.

I’m very impressed with the expected revenue growth of at least 36% this year and feel quite comfortable owning this stock, I have covered it for years.

Aggressive Growth Portfolio

6 of 10

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