Interestingly, many make a case that a period of economic weakness creates demand for outsourcing services as many companies seek to cut costs. We see that as being true, but still believe the company does better in an expanding economic climate. However, as we come out of a period of economic weakness, we believe prospective clients may look to increase outsourcing services to remain lean in good times after enduring the brunt of an economic downturn while existing clients ramp up more discretionary IT spending.
Currently, North America accounts for 79.5% of sales, Europe represents 16% and Asia Pacific totals 4.5%. As Europe looks to exit from its economic malaise, we believe the offshoring trend they have long shunned may begin to take hold as they can no longer ignore the economics.
The company has some outsized exposure to a few market verticals. The financial services vertical represents approximately 42% of sales and has been sluggish of late. Health care represents 25.5% of sales, manufacturing, retail and logistics comprise 21% and entertainment and technology total nearly 12% of revenue.
Cognizant stands to benefit from an improvement in the spending environment amongst its financial services customers as we go forward and as Cognizant continues to make inroads into other market verticals including the public sector.
Cognizant had been consistently outperforming Wall Street's expectations until the second quarter of 2012 when the macroeconomic environment caught up with the company and its business was affected and its guidance was revised lower. There had been much consternation about where 2013 guidance would fall out, given the continued economic pressures.
Recently, Cognizant published its 2013 executive compensation plan, which has historically been a good indicator of where its guidance is likely to come out. Wall Street was relieved with Cognizant's 2013 revenue growth goal of 15.9% (this is the level, if achieved, where 100% of executives' "performance units" vest) and the stock rallied, as many had feared worse.
Cognizant has traded with an average 20x price/earnings multiple over the past five years. The stock is currently trading at 18x consensus 2013 EPS of $4.00 a share. Meanwhile the company has a strong balance sheet with over $8.50 per share in cash and investments and no debt. We believe the stock's multiple could increase in a better environment and/or as its newer growth initiatives take hold.