Cognizant to Break Through on Economic Improvement

NEW YORK ( TheStreet) -- It takes money to make money. We believe Cognizant Technology Solutions ( CTSH) personifies that idiom. Cognizant is an attractive long-term investment and we recommend investors start a small position at current prices, approximately $72 per share, with an eye on increasing that position on days when there is a general market pullback.

Cognizant is a leading global provider of information technology, consulting, IT infrastructure and business process outsourcing services. The company is well regarded as being run by top-quality management with extraordinary vision.

Cognizant employs more than 150,000 people worldwide. The company has targeted operating margin of 19% to 20%, below its peers, as management has decided to reinvest profits above those levels back into its business. In doing so, Cognizant has seen a growth rate significantly above its peers.

We believe management's focus on the future is what will continue to allow Cognizant to outperform and is a key tenet of our investment thesis. This is what we mean when we use the phrase "it takes money to make money." We believe upside to current expectations lies in management's newer growth opportunities, including expanding its geographic presence (with greater penetration into Europe and Latin America), moving deeper into traditional consulting services and wading into social media, mobile, analytics and cloud services.

Cognizant is often viewed as an Indian IT outsourcer (work done overseas is referred to as "offshoring"), as the bulk of its business is done in India, yet the company is much more than that. In 2011, Cognizant had approximately 15% market share within the global offshore IT services market.

The company derives approximately 49% of its revenue from its application management business, and 51% from its application development business, which is a more discretionary spend by its nature. In periods of economic weakness, these development projects could get pushed out, causing revenue growth to slow.

Business process outsourcing, remote infrastructure management and consulting comprise approximately 15% of Cognizant's sales. We believe Cognizant is beginning to shift itself to a more traditional outsourcer, not just offering offshore services, and will better compete with traditional consulting firms like Accenture ( ACN) and IBM ( IBM).

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