Cognizant Technology Solutions: Double-Digit Growth, Strong Cash Flow, Profitable Operations

| About: Cognizant Technology (CTSH)

Cognizant Technology Solutions (NASDAQ:CTSH) began operations in 1994 as an in-house technology development center for U.S-based Dun & Bradstreet with operations in India. Spun-off as a separate company in 1998 at a price of $10 per share, Cognizant's culture reflects extensive international business experience and educational backgrounds among its senior management. A good example is the company's CEO, Francisco D'Souza, who was born in Kenya, educated in Asia and the U.S., and has lived throughout the world.

Over the past five years, Cognizant has generated industry-leading growth and rising profitability with sales compounding at a 30% annual rate to more than $6 billion with net income and EPS both growing at 26% annual rates over the same period. Just 17 years after launching the company, Cognizant joined the Fortune 500 ranking of America's largest companies.

Cognizant has delivered this growth by helping its more than 800 clients operate more cost-effectively and efficiently through investments in information technology. Cognizant also enables clients to respond to economic and competitive pressures through its consulting and business process outsourcing services. As companies are being transformed by mobile devices, cloud computing, predictive analytics, social networks and global commerce, Cognizant Technology Solutions helps clients use these technologies to increase flexibility, lower costs and decrease time to market.

Cognizant serves an expanding and broad array of industries including financial services, which accounted for 41% of 2011 revenues; healthcare, which represented 27% of sales; manufacturing/retail/logistics, which were 20% of revenues; and other industries making up the balance.


Cognizant's business generates strong cash flows with free cash flow compounding at a 37% annual growth rate over the last decade. During the first half of 2012, free cash flow jumped 68% to $287 million with cash on the debt-free balance sheet topping $2.3 billion as of 6/30/12. Given an attractive stock valuation, the firm spent $419 million on share repurchases during the first half.


Cognizant's business model is highly profitable with return on shareholders' equity exceeding 20% each year over the last decade. Despite a challenging macro-environment, demand for Cognizant's services remains strong as they continue to capture market share. Economic downturns serve as a catalyst for clients to embrace a broader range of Cognizant's services. During the second quarter, the company closed a number of significant transformational engagements including a $330 million expansion with ING U.S. and a comprehensive, multi-year engagement with European-based Royal Philips Electronics.

Management forecasts further double-digit growth in 2012 with sales expected to rise about 20% to at least $7.3 billion with EPS expected to be at least $3.38. Long-term investors should be cognizant of Cognizant, a high-quality company generating profitable, double-digit growth and strong cash flows.

Disclosure: I am long CTSH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.