Barclays Shows Conviction In Call For Cognizant Growth To Reaccelerate Into 2017

Barclays reiterated its Overweight rating on Cognizant Technology Solutions Corp CTSH, saying it continues to view shares as attractive, offering a good risk/reward at current levels.

Rating And Justification

Barclays said its call for growth "should reaccelerate into 2017," which was reinforced by Cognizant's management team at a number of recent conferences.

"While it's difficult to parse where results will fall within the company's guidance range, we remain confident in CTSH's ability to meet its 2016 outlook and continue to anticipate further acceleration in 2017 from 2016 levels, which we believe will be more indicative of a sustainable long-term growth rate," analyst Darrin Peller wrote in a note.

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Cognizant sees fiscal 2016 non-GAAP EPS in the range of $3.32 to $3.44 (Barclays: $3.42) on revenue of $13.65 billion to $14.0 billion. Street currently expects earnings of $3.39 per share on revenue of $13.81 billion.

Investors' concerns following the company's first quarter earnings were "centered on the financial services and healthcare verticals." The company said financial services were hurt by a large global bank pullback, while uncertainty in the payer space due to M&A weighed on healthcare vertical.

The Sector

Peller said, "While CTSH CFO Karen McLoughlin pointed out that a recovery in banking has already begun [...] the healthcare M&A process is still ongoing, tying up discretionary spend among the four largest healthcare players."

In addition, the analyst also noted that Cognizant President Gordon Coburn emphasized first quarter challenges are now included in the company's run rate and are not expected to affect future quarters.

"We continue to believe there is skepticism on the story, reflected by the multiple discount vs. peers (CTSH ~15.5x '17 EPS versus a high-teens to 20x multiple for ACN and other Indian peers)," Peller highlighted.

Shares of Cognizant closed Monday's regular trading session at $60.35 and were trading up 0.58 percent in the first hour of Tuesday's regular session. Peller has a price target of $70.