Cognizant Technology Solutions (CTSH) lowered its full-year outlook yesterday and news sent CTSH from $70 to $56.
Weakness in North America’s large banks and pharmaceutical companies are to blame for the underachievement which is set to occur.
The real news is CTSH’s Long Term Growth Rate (LTG) is going to take a hit — in my eyes anyway. IT outsourcing has been one of theee best industries for the past decade, but the high growth was done earlier in the decade.
Ten Year Chart
Notice in the ten-year chart (2012 Q1) that the company was growing profits 40% a year during the first half of the decade (bottom, left). More recently the company was considered to be a 20% grower (bottom, right).
The news yesterday has probably taken CTSH from a 18% profit grower to a 15% one. That’s going to make it hard for the stock to rally back to $70 this quarter. Honestly, there’s been a lot of stocks taking hits this quarter after reporting earnings. It’s a bad month for a lot of stocks. Things were too good to be true in the first quarter of 2012.
Sharek’s Take
The lower LTG will make CTSH’s P/E come down.
- This company sold for 21 times earnings last quarter.
- I thought CTSH was worth 25 times earnings.
- Now the stock will probably be worth 15 to 18 times earnings.
This year’s earnings estimate is currently $3.43 a share (will probably come down in the coming week), and at $56 the stock’s selling for 16 times earnings. So right now CTSH is right where it should be. The stock deserved the hit it took.
Disclosure: Clients of David Sharek owned shares of CTSH at the time of publication.
