Cognizant Technology Solutions Corp CTSH has historically sacrificed revenue growth for margin expansion, although revenue growth typically has a bigger impact on multiples than margin expansion, according to BMO Capital Markets.
The sell-side firm finds it encouraging that the IT company is targeting modest margin expansion in 2020 and beyond, with expectations that it should drive long-term shareholder value.
The Analyst
Analyst Keith Bachman upgraded Cognizant Technology Solutions from Market Perform to Outperform and lifted the price target from $80 to $88.
The Thesis
The appointment of Brian Humphries as Cognizant’s CEO is a good decision, Bachman said in the Wednesday upgrade note.
Humphries is an “excellent addition," and the new management is likely to optimize for revenue growth, the analyst said.
Cognizant issued FY19 revenue growth guidance of 7-9 percent, which missed consensus expectations. Humphries is likely to focus on Cognizant consistently achieving or exceeding investor expectations and could provide revised guidance that may well be lower than current projections, Bachman said.
More realistic margin targets in FY20 will enable Cognizant to focus on growing its topline more than it has in recent years, the analyst said.
The journey to creating meaningful shareholder value is unlikely to be smooth, Bachman said, adding that meeting expectations will drive the stock higher.
Price Action
Cognizant shares were down 2.23 percent at $72.84 at the time of publication Thursday.
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