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Stock Analysis - Cognizant Technology Company (NASDAQ:CTSH)
Long time reader Tri suggested that I have a look at Cognizant Technology Company which trades on the NASDAQ under the symbol CTSH. He said that it was “on sale big time.” Let’s have a look.
Company Profile:
From Yahoo Finance:
Cognizant Technology Solutions Corporation provides information technology (IT) consulting and technology services in North America, Europe, and Asia. Its services include business process consulting; IT strategy consulting; technology consulting; application design, development, integration, and re-engineering; complex custom systems development; data warehousing/business intelligence; customer relationship management (CRM) and enterprise resource planning (ERP) system implementation; and software testing services. The company also offers outsourcing services, including application maintenance, CRM and ERP maintenance, IT infrastructure outsourcing, and business process outsourcing. Cognizant Technology Solutions offers its services to various markets, such as financial services, healthcare, manufacturing, retail and logistics, telecommunications, information services, media, and high technology. The company was founded in 1994 and is headquartered in Teaneck, New Jersey.
Cognizant is a large cap stock with a market capitalization of $11.23B.
Financial Analysis:
Ok. Let’s get to the good stuff. Let’s see those Big Five and see how big this moat is!
First things first. Let’s see how well management is doing. Looking at the Return on Invested Capital (ROIC), it is incredibly consistent. I only have 9 years of ROIC data, but every year is just over 20%! And of course, that makes for a nice 5 year average of 22.10%. Management has consistently been deploying capital extremely efficiently at CTSH.
And looking at the Return on Equity (ROE), it just confirms what a great job management has been doing. Above 20% for the whole period with a 10 year average of 22.41%, 5 year average of 20.66% and a 1 year ROE of 20.58%.
Ok. So management has been deploying capital extremely well. Now, how fast have they been growing the equity? Let’s just say that it has been growing stupendously! Not including the 1998 equity growth rate (which my data shows as 575%!), the other 9 years are absolutely amazing! Every year is coming in at over 38%! The five year average is an astounding 54.74%. And 2006 rang in at 46.99%.
Looking at the earnings growth rate, there are no surprises there. The growth rate has been fantastic with the lowest year coming in at 32.41%. But the average seems to be hovering around the 50% range.
Sales growth rate has been equally as impressive. Some astronomical numbers that are consistently in the 50-60% range.
And they have even been growing their cash flows! Once again, in the 40%+ range.
I must admit, these are some of the BEST numbers I have ever seen. Let’s see if this stock is on sale!
Looking at the P/E values, I have a 10 year average of 37.33; a 5 year average of 39.80 and current P/E of 45.15. These are definitely high P/E numbers, but with the Big Five that we just saw, I can see why. Of course, I am going conservative and will use the 10 year number of 37.33.
For EPS growth rate, I see that the equity growth rate has been extremely high with a 5 year average of 54.74% and 1 year of 46.99%. Can I really use a forward EPS growth rate that large? The analysts seem to have the future EPS growth rate set at 32%. Ok. More conservative than the historical numbers, so let’s go with that.
That leads me to a sticker price of $256.38 and an MOS price of $128.19. At close of Friday, the stock price was $78.11. What? This implies a discount to MOS (yes, to MOS!!) of 39.07%!
This stock seems to be on sale! You have to see it to believe it. Here are my calculations.
The Tools
With all this excitement, I just have to check the tools and see what they have to say.
MACD Analysis:
The MACD analysis shows the beginning of a mountain which means “time to buy.”
Stochatics Analysis:
This indicator does currently signal a buy. However, from the chart, it looks as though the buy line is about to cross the sell line, which would normally be an indicator of a sell.
Moving Average Analysis:
The price line crossed about the moving average line a few days ago. This one seems to indicate a buy as well.
Conclusion:
Well, all the fundamentals point to a buy for this stock. It seems to be selling at a deep discount (39%) to its Margin of Safety price.
The technical tools also seem to imply a buy, although the stochastics seems to be about to go negative. So might have to watch that. However, Phil Town says that all 3 tools have to indicate the same signal (buy or sell) before you act.
I just want to thank Tri for bringing Cognizant Technologies Company to my attention. So far, this one seems like a beauty.
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One question you have to ask before you start buying it is: Why in the hell did the price drop so quickly? Was it crazy ass Mr. Market or was there an internal reason not shown by the numbers? I suggest reading the managers’ annual reports for the past few years to see if they’re bullshitting us (always remember Enron!) and then do a google news search on the company. THEN I would buy if no alarm bells go off.
June 6th, 2007 at 12:33 pmI most definitely agree with you Matt.
This analysis is really just a first step to see if the company is worth studying further.
I see that CTSH is down another $1.59 today with the rest of the market.
June 6th, 2007 at 8:34 pmWell if it follows the market (ie, it’s going down when the market goes down) then hooray! That means a buying opportunity soon.
June 7th, 2007 at 11:40 amI wouldn’t call the Indian offshore IT consulting market a “wide moat business.” It has, however, been a great growth stock.
The main problem right now is whether the industry will be able to attract and retain enough employees to sustain the growth. There are signs that this may finally be catching up to them.
I have written a number of articles at Stock Market Beat if you are interested in more of the fundamental story.
June 14th, 2007 at 7:46 amMatt, Joe,
The reason the stock is down — in the last conference call the management told the analysts that they are revising (downward) the engineer recruitment targets for the year.
So, you have to think how sustainable is the growth. It has been a great company so far. Will it continue to grow at the expected rate is the question.
June 14th, 2007 at 8:38 amTrent, New Guy,
As you see from my follow up post to CTSH, I also was concerned about a forward EPS growth rate of 32%. Is it sustainable? That is why I compared it to IBM’s current sales.
Now, IBM might not have been the best choice to compare with CTSH as they also have sales from other divisions than just their consulting.
Thank you both for adding to this discussion. This is exactly the type of discussion that I am hoping to foster on this site. So that we can all benefit in the long run.
June 14th, 2007 at 9:08 amThe drop in price may be partially attributable to the EPS announcement regarding recruitment. However the more significant drop has been due to the rupee exchange rate. Although Cognizant is the only US based company in its class, the majority of the employees are in India and a drop in the exchange rate implies a higher salary to the workforce. Also, factor in the overall India market which has dropped significantly. In contrast to the large drop, Cognizant has been one of the least impacted compared to its competition.
June 14th, 2007 at 12:02 pmThose are all valid points Randy. And I also had a comment from another reader Sam along the same vein. He mentioned the following as concerns:
1.Falling dollar/rising rupee
2.Labor shortage in India leading to poor quality of recruits
3.Salary hikes in India
4.Attrition
5.Competition from the likes of Accenture & IBM who are expanding in India
One thing I did not do with CTSH is follow up my finding with a deeper analysis like I had performed for CRDN. That deeper analysis of CRDN found that the company relied on a single customer (US military) purchasing a single product (armored vests). However, that was not evident from the preliminary analysis.
Just a note to readers: This initial analysis was to find a wonderful business. It is merely the first step. Now, digging deeper and doing your due diligence is required to ensure that this really is an investment for you.
This has been an excellent discussion and is exactly what I had hoped to foster on this site.
June 14th, 2007 at 12:26 pmCTSH seems to be becoming quite the hot stock with its recent movement.
In fact, Jade Investments has done a technical analysis of CTSH’s current moves on the market. As you know, Phil Town does use technical analysis to determine entry and exit points.
So have a look at Jade Money’s analysis.
June 14th, 2007 at 12:40 pmI have worked in Cognizant from 2002 through end of 2006. So I know how the firm is doing. When I joined,there were about 6000 employees in the firm.
June 14th, 2007 at 1:12 pmWhen i left the number had gone upto 32000. That talks about the growth of the company. It has gone for stock splits for atleast 3 times that I know of. It was in the top ten list of best performing stocks in nasdaq for 2004.
One thing which surprises me though is how the value is set at almost $80 now. There is no product that they have of their own and all the revenue comes from services. The question I guess would be whether they can sustain the high P/E based on providing mere services without really having any solid product to boast of?
That’s fantastic. So in four years they had five times as many employees, up to 32000. In four more years they will obviously have 120,000 employees, and four years later 600,000. I’m betting on this one. Good thing there’s no competition in outsourcing.
June 18th, 2007 at 6:29 pmThanks for the analysis and discussion.
All these points are good and were brought up in the last quarter’s conference call. I believe the stock price drop is most in fear of a slowdown in growth. The company said that they intend to slow the rate of new hires, the means by which they have added the capacity to support the growth up to now. In the call they said they wanted to maintain their margins and higher salaries because of the strong rupee would put pressure on those margins. As a result the company said they would hire fewer new employees and use some of their current excess capacity. I appologize for not remembering the figure exactly, but they said their current capacity utilization rate was quite low - my impression was in the area of 60%. This might make sense if earlier hires are now up to speed and can handle more work, if it turns out they cannot, growth will slow. Without growth, the P/E will not be supported.
June 27th, 2007 at 3:55 pm[…] CTSH Stock Split NPG, You might want to recheck your numbers: Investment Jungle » Blog Archive » Stock Analysis - Cognizant Technology Company (NASDAQ:CTSH) […]
September 17th, 2007 at 6:05 pm