Cognizant's Surprise Announcements Leave Investors Scratching Their Heads; $50 Level Attractive

Baird says Cognizant Technology Solutions Corp CTSH shares are attractive at current levels and retained its Outperform rating following the resignation of its President Gordon Coburn and probe of certain potentially improper payments related to facilities in India.

Cognizant appointed Rajeev Mehta as president of the company. Mehta, who was the CEO of IT Services at Cognizant, has been with the company for about 20 years.

"Given Gordon's strong reputation, his resignation and the potentially improper payments compounds the issue of slowing company/industry growth, though hard not to like the stock around $50 (~12X 2018E)," analyst David Koning wrote in a note.

Related Link: Some May View Cognizant As 'Uninvestable' Amid Near-Term Overhang

The investigation could result in damage to brand resulting in client loss, fines and potential limits on operations in certain areas.
However, Koning, who has a $70 price target, said the $50 level offers value for the following reasons:

• "Good companies tend to resolve issues."
• "Revenue ~10% organic growth (faster than S&P), while trading at a 10%+ discount to the S&P."
• "Large net cash balance (nearly ~$6/share). Net cash of >10% of market cap."
• "Offshore IT Outsourcing remains a faster-than-S&P growth market, granted industry growth has slowed to ~8-10% in 2016 (from ~10-12% in 2015)."
• "While margins across the industry could be biased lower, Cognizant seems well protected by (1) strategy to heavily invest (keeping margins ~20% compared with industry of mid-20%) and (2) favorable INR hedges)."
• "$50 reflects <14X NTM EPS (~20% discount to the S&P for above S&P growth).

At time of writing, shares of Cognizant rose 6.58 percent to $50.85.