JP Morgan Rates Cognizant Technology Solutions

JP Morgan moved from Not Rated to an Overweight rating on Cognizant Technology Solutions Corp CTSH Tuesday and set a $63 price target.

Analyst Tien-tsin Huang noted that “last quarter, CTSH closed the largest acquisition by an offshore ITS firm, buying TriZetto for $2.7B in cash.

“We like the acquired asset as it significantly enhances CTSH’s healthcare capabilities, where secular growth opportunities remain strong, giving CTSH the right mix to remain a top-tier large-cap grower in our ITS coverage this year and next.”

Huang added that “CY15 EPS accretion risk from the deal seems low, as much of the accretion stems from the low cost of debt. While the valuation paid likely requires CTSH to deliver on its big synergy target ($1.5B over five years), we consider the majority (two-thirds) of synergy attainment to be lower risk in the near term, providing fuel for revenue acceleration mid-term.”

“CTSH will eventually need to deliver another large integrated deal such as HealthNet to label this deal a success. The latter will not be easy, and hinges on sharp execution of the HealthNet deal, which we will be watching closely to support our OW thesis,” according to the analyst report.

Regarding the TriZetto acquisition, Huang commented that the company’s platforms touch “50 percent of the US population, with the flagship product, Facets, considered to be one of the most comprehensive solutions in the industry.”

Huang concluded that “secular demand for the solution should benefit from continuing consolidation of core admin platforms at large clients, and increasing enrollments in health insurance, driven by ACA. The company also offers revenue cycle management SaaS to healthcare providers which, although small, benefits from integration with payers’ core admin software and should grow at a faster clip (than TriZetto’s core growth).”

Cognizant Technology Solutions recently traded at $55.15, up 1.8 percent.