Cognizant Technology - Fair Valuation For This Long Term Growth Story

| About: Cognizant Technology (CTSH)

Shares of Cognizant Technology (CTSH) ended 11% higher today after the company released its second quarter results. The provider of custom information technology services reported a strong set of quarterly results.

Q2 Results Are In

The provider of information technology, consulting, and business processing services reported second quarter revenues of $1.795 billion. Revenues were up 4.9% compared to the first quarter, and 20.9% higher compared to last year. GAAP earnings per share came in at $0.82 versus $0.67 last year. Earnings were negatively impacted by $0.02 per share, as a result of a strong U.S. dollar.

The company added six new strategic customers over the quarter, including Philips Electronics. Growth in the remainder of 2012 will mostly come from a ramp-up of current clients, rather than from new client growth.

CEO Francisco D'Souza commented on the results:

...we are well positioned to capitalize on these opportunities due to our unique combination of management consulting and operational capabilities in areas such as large scale program management and change management.

Revenue Sources

Financial services is still the dominant revenue source for the company. Sales came in at $736.9 million, up 20.3% compared to last year. Healthcare revenues rose 25.3% to $484.3 million, while manufacturing and logistical revenues are up 21.8% to $358.6 million. "Other" revenues rose 12.4% to $215.4 million.

Revenues in North America increased 24.2% to $1.43 billion. Growth in Europe came in at a mere 2.1%, or $282.7 million, driven by a 3.8% growth rate in the U.K. Revenues in the rest of the company's global rose 45.1% to $77.6 million.


For the third quarter, Cognizant anticipates revenues of at least $1.875 billion. GAAP-diluted earnings per share are expected to come in at $0.86.

For the full year of 2012, the company projects revenues of at least $7.34 billion, up 20% compared to 2011. Diluted earnings per share on a GAAP basis are expected at $3.38. The outlook is in-line with analysts' forecasts of earnings of $3.37 per share on revenues of $7.34 billion.


Cognizant Technology ended its second quarter with $2.35 billion in cash and equivalents. The company operates without debt, resulting in a net cash position of roughly $2.3 billion. For the first six months of 2012, the company reported revenues of $3.50 billion, on which it reported net earnings of $496 million, or $1.61 per diluted share.

Factoring in today's 11% jump in the share price, the market values the firm at $19.5 billion. Excluding the company's net cash position, the market values the operating assets at $17.2 billion. Based on the full year outlook of $7.3 billion in revenues and diluted earnings per share of $3.38, the firm is valued at 2.4 times annual revenues and 17 times expected earnings for 2012.

The valuation compares to a revenue multiple of 2.1 times for IBM (IBM) and 3.2 times for Infosys (INFY). These firms trade at 14 and 13 times earnings, respectively.

Currently, Cognizant Technology does not pay a dividend.

Investment Thesis

Year to date, shares of Cognizant trade flat after today's gains. Shares rose steadily to peaks of $78 in March, but fell sharply to $56 in May after the company issued soft guidance for the remainder of 2012.

Shares of Cognizant have returned over 50% over the past five years. The stock rose from $20 in the beginning of 2009, peaking around $80 in the beginning of 2011. From that point in time, shares have moved within a $60-$80 trading range.

Today's results take away some worries among investors, after the company's disappointing outlook announcement in May. Strong revenue and profit growth, combined with a solid balance sheet, is promising for the future, meaning long term investors can pick up a solid technology company at a fair price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.