Jefferies Bullish on Cognizant In Nearly Any Scenario

Nov.19.07 | About: Cognizant Technology (CTSH)

Jefferies is out with a very nice call on Cognizant Tech (NASDAQ:CTSH) saying that with it trading well below its growth rate (for the first time!), they see upside to CTSH relative to almost any scenario for 2008.

According to Jeffco, CTSH has grown faster than any leading player in offshore IT; they expect this trend to continue. At the same time, they recognize that given its size, combined with accelerating growth through much of last year, y/y comparables and the law of large numbers are in play here.

Also, given recent turmoil in the financial services sector (45% of CTSH revs), it is reasonable to assume that 2008 could experience some softness in demand, or at the very least that 2008 could get off to a slower start than we have witnessed in previous years. They have assumed a slowdown in overall growth next year from 50% to 34%, based on a combination of conservatism and current size of the business. This growth rate relative to current valuation is compelling, in Jeffco's view.

Additionally they believe that 2008 guidance when it is released should be a catalyst to the stock. Even if guidance comes in below consensus, the firm feels that current valuation would suggest a sigh of relief for the stock, providing an upside catalyst. Reiterate Buy and $50 target.

Notablecalls: CTSH got hit pretty badly couple of weeks ago after not offering investors the usual wide beat & raise quarter they have grown accustomed to over the past years. This was seen as the first sign of trouble about to hit the offshore IT services sector.

Must say it's hard to argue with this, with the whole sector leveraged to the US financial services space. Yet even if we don't see the 40%+ growth rates in the financial side over the next year or two (or possibly never), the stock still looks interesting here.

The wording of the call is likely strong enough to create some reasonably good buy interest over the next couple of days. I would not be surprised to see CTSH up 1-2 bucks in the short term.