This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Cognizant to Break Through on Economic Improvement

Stocks in this article: CTSH ACN IBM

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.

2 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,568.11 +211.24 1.22%
S&P 500 2,034.67 +21.78 1.08%
NASDAQ 4,700.8980 +56.5860 1.22%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs