If you look at the below chart of this stock's price, you'll wish you'd bought it in1999 when you could have all you wanted at $1.60 [split adjusted for 3 stock splits since then]. It's now sitting at an all time high of $80. The chart looks like a rocket launch photo, the trailing smoke being the previous price points as the stock continued its upward flight.
CTSH 8-yr chart
The question for investors now is: will the rocket continue to soar?
The numbers suggest good things have happened, and expectations are for good results ahead. In the last 5 years, earnings grew by an impressive 48.5% annually, on average. Revenues went up by 39.5% annually, on average, in the same time. Now analysts are predicting a little slowdown. Look for sales to increase by "only" 31% a year, on average, over the next 5 years. Earnings are expected to grow by a "mere" 30% a year, on average. Of course, all this good news hasn't been buried and lost on investors. The stock carries a P/E [price to earnings] ratio of 54.
Here are some more impressive numbers. Return on Equity last year was 21.5%. This year it should hit 23.5%. It's predicted to be 24% next year. Revenues were $885 million last year. They are fore-casted to be $1.4 billion this year and $1.92 billion next year. Net profit margin is 16.4% this year, down a little from 17.4% last year. There is no debt, and the company has about $535 million in cash or equivalents.
That war chest gives CTSH plenty of options. Most likely it will continue to make acquisitions in the U.S., India and Europe. With a solid growth company, it's unlikely a dividend is forthcoming. Most shareholders like the return on their equity the company is earning rather than paying them the money to find those returns. Still, many technology companies are paying a quarterly stipend and maybe a small token to shareholders will be forthcoming. Probably not, but when there's lots of cash laying around, shareholders get nervous and want it used or given to them. Ask Microsoft (MSFT).
Here's what happened last quarter. Revenues were up 60%, thanks to an increased market share in healthcare, life sciences, and financial services sectors. Earnings jumped by 43%. The company hired 4700 new employees and is aiming for a total of 38,000 total employees by the end of the year. Plans are to spend about $200 million in India through 2008 to expand its infrastructure and hire more than 30,000 new employees. [These new sites are usually built within special economic zones which give the company generous tax benefits.]
So what's not to like? Nothing about the company. It's growing as fast as almost any company you can find. The problem is the price of the stock. At 54 times earnings, the price fully reflects the powerful story CTSH tells. Unless CTSH can surprise analysts on the upside, it seems investors have pushed the price a little beyond what the earnings warrant. So if you're going to investigate CTSH further and get excited about all the great numbers, keep in mind one of the largest: the p/e ratio. Investors know this great story and have rewarded the stock's price accordingly.
Disclosure: Author has no position in CTSH
