Cowen Sees A Buying Opportunity in Cognizant

| About: Cognizant Technology (CTSH)
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Cognizant (NASDAQ:CTSH) shares have dropped almost 19% since mid-July, largely on fears that the IT outsourcing company could be vulnerable to the recent troubles in the credit markets, given its considerable exposure to the financial sector. Actually, there are already several examples of outsourcing companies that have been affected by the crisis.

Last month, WNS Holdings (NYSE:WNS), a Mumbai-based provider of business process outsourcing services, trimmed guidance after the collapse of lender First Magnus Financial. Also last month, ExlService Holdings (NASDAQ:EXLS) announced that a non-prime mortgage lender which represented about 2% of its revenue had stopped originating new loans, and would be cutting back service.

But be careful when you extrapolate. In a research note Friday morning, Cowen’s Moshe Katri pounded the table on Cognizant shares. As he notes, 47% of the company’s revenues come from financial service firms, roughly equally divided from insurance, commercial banks and equity capital market firms. The most vulnerable area, he contends, is in the equity capital markets area, where 50% of spending is discretionary; that represents about 8% of the company’s overall revenue. He also notes that the company has zero business from sub-prime lenders.

Katri notes that in 2002, after the September 11 attacks, discretionary IT spending almost ceased, amid high levels of anti-outsourcing rhetoric and tensions on the India-Pakistan border. Nonetheless, Cognizant’s development revenue that year grew 26%, and maintenance revenue increased 50%.

The point of all this: Katri says Cognizant in 2008 should grow revenue and EPS 35-40%. The stock, he notes, trades at a considerable discount to its growth rate, now at about 25x projected 2008 EPS of $2.84. The selloff, he concludes, is a buying opportunity.

CTSH 1-yr chart: