Cognizant Technology: On a Tear and Still Undervalued

| About: Cognizant Technology (CTSH)

Cognizant Technology Solutions (NASDAQ:CTSH) is in the business of information technology, or more specifically technology strategy consulting. Essentially, they consult other businesses on how to more efficiently run their current technology infrastructure. All companies are looking for ways to do more with less these days, as wringing out costs is the best way to boost the bottom line as revenue growth has been tough to come by in recent quarters. CTSH’s second quarter results announced Tuesday morning show that their business is growing in this environment and show no signs of slowing.

Cognizant reported earnings per share of 47 cents which was 10 cents better Wall Street expected, and 12 cents better than a year ago. Many companies have beaten earnings estimates so far this year, but most of them have beaten expectations by cutting costs more than expected. In contrast to that trend, Cognizant actually increased revenue by more than 13% over last year. This strong growth prompted the company to lift its annual growth target to at least 11.5% from at least 10%. Furthermore, CTSH raised its third quarter EPS CTSH target to 44 cents per share, 5 cents better than the street expected and full year was lifted to $1.80 which is 26 cents better than the street’s forecast. The stock has been trading much higher all day, as shares are up about 10.5% approaching the close. Volume has also been quite high, nearly triple the normal daily trading volume prior to the close.

Even as the stock has soared nearly 90% year to date, we still believe there could be some fuel left in the tank. This was a breakout quarter, as the last few quarters have seen the company hit expectations but not much more. Clearly, Cognizant is in the sweet spot of this economy; helping other firms save money by improving their current processes. They are growing sales in an environment where that feat is extremely rare, and instead of resting on their laurels they are issuing an upbeat outlook and raising guidance.

This report shows us that the run up in CTSH shares has been justified by an improvement in fundamentals. We are going to reiterate our Undervalued stance on these shares for the time being until either the price tag becomes to expensive or their growth story fizzles. They have a stellar balance sheet with no long term debt and a current ratio of about 5. We would start to become more cautious when this stock got into the low to mid $40’s, but until that time it looks like a good candidate for a defensive investor that is still looking for upside.

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