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

Citi downgraded Cognizant Technology Solutions Corp (NASDAQ: CTSH) from Buy to a Neutral after the company disclosed an investigation on the possible violation of Foreign Corrupt Practices Act. The firm slashed price target from $68 to $55 on the stock.

Analysts Ashwin Shirvaikar and Ryan Potter pointed out that the downgrade isn't due to any changes in the fundamentals and believes the company is making investments appropriately for long-term success, although there are challenges in the near-term. The lead analyst thinks the latest development and immediate term challenges pose as an "overhang" for the stock.

The brokerage pointed out that Cognizant notified the regulators on its own about the internal investigation on Indian facilities. Aside from that, it named Rajeev Mehta as its President in place of Gordon Coburn, who resigned. The research cited that Raj occupied the position of CEO of IT Services and has been with CTSH for more than two decades.

On the implication of the latest developments, Citi thinks, "It is too early to know more specifics but the possible violations appear to be quite serious, especially given the resignation of CTSH's former President. Under the FCPA criminal investigation, our quick check shows that the DOJ is able to fine small amounts for each anti-bribery violation and slightly higher if there is an accounting violation (not known at this stage), but these are per violation fines and the scope is not known at this point."

The stock traded recently at $45.96, down $9.02, or 16.40 percent.