By Renee O'Farrell
Information technology services provider Cognizant Technology Solutions (CTSH) fell over 12% in pre-market trading on Monday, May 7, after the company reported mixed first quarter performance. Cognizant managed to beat analyst earnings expectations by almost 9%, coming in at 86 cents per share over estimates of 79 cents per share, but it only just met revenue expectations of $1.71 billion.
These numbers may not be too bad, but investors were thrown after the company announced that it was lowering its 2012 forecast by 7 cents, down to $3.62 per share, and that excludes estimated stock-based compensation expenses. The company is also expecting less revenue - just $7.34 billion for the year compared to the estimate of $7.53 billion announced in February. Analysts had been expecting that it would raise its revenue growth guidance. On the plus side, Cognizant is expanding its share repurchase program by $400 million, which brings the total program to $1 billion. To date, $423 million in shares have been bought back by the company.
When the markets opened on May 7, Cognizant was trading at $61 a share, down from $69.66 at the close of trading on Friday, May 4. Analysts expect the company to earn $3.45 a share this year, rising to $4.11 a share next year, making for a forward price to earnings ratio of 14.84 -- a discount compared to its industry's average of 16.55. Analysts estimate the company's earnings will grow at an average of 18.88% a year over the next five years, compared to expectations of 16.61% for its industry.
Many of Cognizant's competitors are in the same boat. Last month, Cognizant's Indian rival Infosys (INFY) forecasted its revenue growth, reporting less than what analysts expected and sending its shares tumbling. The issue at hand here isn't the companies themselves necessarily but the markets in which they operate -- the demand just isn't there. Infosys recently traded at $45 a share. Consensus estimates place the company's earnings at $3.11 per share this year, rising to $3.38 per share next year. This means that Infosys is priced at just over 13 times its forward earnings. Analysts estimate Infosys will enjoy earnings growth of 15.55% per annum on average over the next five years.
The outlook is a little brighter for larger information technology services providers, but not by that much. Accenture (ACN) has a larger market cap than Infosys or Cognizant. It recently traded at $61 a share. The company is expected to earn $3.88 a share this year, rising to $4.28 a share in 2013, making its forward price to earnings ratio 14.25. Analyst consensus estimates say that Accenture's earnings will grow by 10.60% a year on average over the next five years.
IBM (IBM) is another good example. The company managed to beat first quarter earnings expectations by almost 5% ($2.78 per share on expectations of $2.65 a share) when certain items are excluded, but it still fell short of revenue estimates ($24.7 billion versus $24.77 billion). IBM did raise its full-year earnings forecast, going from $14.85 a share to $15 a share, but IBM is much more diversified than its smaller competitors. It is also priced lower at just 12.26 times its forward earnings, but the company also has lower earnings expectations. Analysts say IBM's earnings will grow by an average of just 10.58% a year over the next five years.
Overall, Cognizant may be a fine investment - some well-known hedge fund managers like Stephen Mandel of Lone Pine Capital, Jeffrey Vinik of Vinik Asset Management and David Stemerman of Conatus Capital Management have more than 3% of their 13F portfolios invested in the company, but with its recent trade price and current expectations, I recommend hold. I recommend investors look more toward the larger companies in this sector, like Accenture or IBM, that, while they may have lower earnings growth estimates, are more consistent investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.