Cognizant Downgraded At Goldman Sachs On Headwinds Through Early 2017

The cyclical headwinds being faced by Cognizant Technology Solutions Corp’s CTSH Financials and Healthcare verticals would likely persist through the first half of 2017, Goldman Sachs’ James Schneider said in a report. He downgraded the rating on the company from Buy to Neutral, while reducing the price target from $68 to $61.

Analyst Schneider believes Cognizant’s growth could outpace that of the broader IT Services group over the long term, given the company’s focus on Digital services and software platforms. He added, however, that there are industry-wide and vertical-specific headwinds in the medium term, as well as the lack of a visible near-term catalyst for the stock.

Reasons For Downgrade

1. Cyclical Slowdown in IT Services: Discretionary spending is likely to “inflect lower over the next 6-12 months based on broader weakness in enterprise spending,” Schneider mentioned.
2. Weakness in Financials and Healthcare: This is expected to persist in the medium term. The Financials segment, which contributes ~40 percent of Cognizant’s sales, is likely to witness pressure due to “the need to reduce maintenance spending to fund compliance and consumer-facing Digital initiatives,” while Healthcare, which accounts for ~30 percent of sales, suffers from uncertainty over pending payer M&A extending into 2017.
3. Shares Under Pressure: “We believe the stock’s multiple is unlikely to expand until either organic growth accelerates, or management adopts more shareholder-friendly capital allocation policies (such as a dividend, which it has indicated is not a near-term priority),” the analyst commented.

Do you have ideas for articles/interviews you'd like to see more of on Benzinga? Please email feedback@benzinga.com with your best article ideas. One person will be randomly selected to win a $20 Amazon gift card!