Citi Expects Cognizant Shares To Do Well Over The Next 12 Months

Citi said the shares of Cognizant Technology Solutions Corp CTSH should do well over the next 12 months while keeping its Buy rating on the stock. However, the brokerage cut its price target to $68 from $71.

"Historically CTSH has commanded a premium valuation because it has grown its revenues faster than the comps. However, in 2016, this 'growth gap' over its peers seems to have disappeared. The key is that this 'growth gap' could re-emerge over the next 12 months and this would clearly be a positive for CTSH," analyst Ashwin Shirvaikar wrote in a note.

Ahead Of Earnings

Citi's comments come ahead of the IT service company's second-quarter earnings, which are expected August 5. The Street expects earnings of $0.82 a share on revenue of $3.37 billion. Citi expects EPS of $0.82.

Related Link: Analysts At Pacific Crest Begin Coverage On Accenture, Cognizant And Other IT Stocks

"CTSH trades on top-line performance. Investors expect ~10 percent–11 percent revenue growth vs. its ~10 percent–13 percent guide. Lowering the top-end will confirm investor fears but may be palatable to investors especially if related to FX volatility," Shirvaikar noted.

Meanwhile, the analyst noted that lowering the bottom of the range possibly crosses a psychological "double-digit growth" threshold, with the result being the valuation may be interpreted as justified rather than attractive.

Shirvaikar said FX should negatively impact the stock's top line, as the British pound depreciates (about 9 percent of revenue comes from U.K. clients). However, the analyst hopes that Cognizant should see some margins' benefit offset due to non-USD cost exposures, as those "cost" currencies depreciate.

In addition, Cognizant could face higher client productivity demands due to automation and the lack of bank budgets and price discipline.

Broadly Optimistic In Light Of Brexit

That said, the analyst noted that Brexit should be a long-term positive for Cognizant.

"Financial Services is an area that could benefit from new and more complex regulatory and compliance requirements driving new work in the UK and Europe," the analyst elaborated.

However, Citi cut its estimates due to the impact of Brexit and clients seeking higher productivity gains linked to the increased usage of automation.

As such, Shirvaikar cut its third-quarter and fourth-quarter EPS estimate by $0.01 to $0.85 and $0.89, while trimming and full-year EPS view by $0.02 to $3.36.

At time of writing, shares of Cognizant rose 1.53 percent to $58.55. The revised price target of $68 represents a potential upside of 17.9 percent over Tuesday's close.

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