Yesterday's Forbes Magazine writes:
Banc of America analyst Abhishek Gami raised his price target to $79 from $76 on shares of Cognizant Technology Solutions (NASDAQ:CTSH), which he said is trading at a 31% discount to its three-year growth rate.
The discount is in stark contrast to the company’s historical 20% premium the shares have enjoyed, Gami said in a note to investors Tuesday.
He added that the recent decline in Cognizant’s stock price was due to the overall weakness in the Indian stock market and in American depository receipts [ADRs] of Indian IT services companies.
We beg to differ. We recently showed that while Cognizant does tend to move in the direction of the Indian markets, it appears to be more influenced by the good ol’ Nasdaq. Here is the updated one-year chart comparing Cognizant to both the Nasdaq and the India Fund (NYSE:IFN):
The three month chart below shows that Cognizant had a much milder sell-off than the Indian markets recently had:
The article goes on to say:
Still, Gami maintained a “buy” rating on the Teaneck, N.J.-based information technology consulting firm, whose employees are mostly located in India, and said it remained his favorite in the sector.
“Despite a future hit to earnings per share growth due to rising tax rates, we believe that Cognizant Technology Solutions’ superior growth rate, defensible margins and attractive valuation relative to peers makes it the top pick among offshore IT services companies.”
We talked about the impact of a rising tax rate when we reviewed Cognizant’s 10Q. The good news is, that while the tax rate will remain at the higher level permanently (after rising in 2009), once a year has passed it will no longer affect Cognizant’s growth rate. The bad news is, investors should start preparing now for the normalized tax rate. That means lower valuations than the company has historically earned.