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Cognizant's Risks Aren't What They Used To Be, Analyst Upgrades

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BMO Capital Markets Upgrades Cognizant On CEO Change
Earnings Scheduled For February 6, 2019

Loop Capital upgraded Cognizant Technology Solutions Corp (NASDAQ: CTSH) following the company's second-quarter results, reasoning that demand headwinds and headline risk are receding at the tech company.

Loop upgraded Cognizant from Hold to Buy and set an $83 price target on Friday.

Meanwhile, BMO Capital Markets maintained an Outperform on the company, encouraged by Cognizant's new return of capital plan and its growth potential, and raised its price target from $69 to $76.

Top-line Sluggishness Could Be In The Rearview Mirror

Second quarter financial services revenue grew 4 percent despite the ongoing headwinds in the banking sector, Loop Capital analyst Joseph Vafi said in a note. The healthcare sector surprised to the upside, with nearly 10 percent growth, Vafi said.

The analyst said the $400 million master services contract Voya Financial Inc (NYSE: VOYA) struck with Cognizant this week is mostly new work. The Voya contract may be representative of a further rebound to come in financials, Vafi said.

"Given that these two sectors have been the biggest hold backs to growth, we believe that the worst of the top line sluggishness could in the rearview mirror for Cognizant," the firm said.

Loop Capital also indicated that Cognizant is committed to broadening and deepening its skills in emerging technologies. Compared to other offshore peers, the firm thinks Cognizant has more to offer, given a higher mix of domestic employees, a seasoned consulting group and comparable cost advantages for volumes done offshore.

In a world where customers thirst for more choices and cloud technologies can oblige them, Cognizant offers the best Chinese menu of service options, the firm said.

Quarterly onsite utilization rebounded by 150 basis points to 93 percent, helped partly by less hiring, according to Loop Capital. Cognizant is also committed to building onshore development centers, which should help drive higher domestic utilization, according to Friday's note. 

EPS Deceleration Trend To Reverse

Loop Capital is of the view that the EPS deceleration trend looks like ready to reverse and that easier comparisons and some strengthening to the top line could lead to modest multiple expansion.

"This, combined with steady earnings growth next year provides an attractive setup for CTSH shares, compelling us to up our rating," the firm said.

June Quarter Testifies To Cognizant's Ability to Deliver

BMO Capital Market's Keith Bachman said he likes Cognizant's strategy to optimize margins, with the second quarter operating margin of 20 percent exceeding the Street estimate of 19.4 percent. The margin outperformance was achieved on the back of cost actions to improve efficiency and lower headcount, according to BMO.

The analyst believes the June quarter was a good indicator of the company's ability to deliver.

Despite the struggles of India-based IT service providers, the analyst thinks the company performed well on both top-line and bottom-line metrics.

Announcing some changes to its model, BMO Capital Market said forex will be "70 basis point less of a hurt" in 2017 and a 60 basis point tailwind in 2018. The firm raised is 2018 margin estimate from 20.3 percent to 20.6 percent.

Accordingly, BMO Capital Markets raised its earnings estimates for 2017 from $3.64 to $3.68 and its 2018 earnings estimate from $4.14 to $4.26, assuming 15.5 percent year-over-year growth in calendar year 2018 earnings per share.

At the time of writing, shares of Cognizant were up 1.97 percent at $71.33.

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Cognizant Technology Higher After Mixed Q4 Report

Latest Ratings for CTSH

DateFirmActionFromTo
Feb 2019BMO CapitalUpgradesMarket PerformOutperform
Jan 2019BernsteinUpgradesMarket PerformOutperform
Nov 2018Cowen & Co.DowngradesOutperformMarket Perform

View More Analyst Ratings for CTSH
View the Latest Analyst Ratings

Posted-In: Loop Capital-Joseph Vafi; BMO Capital Markets - Keith BachmanAnalyst Color Upgrades Price Target Analyst Ratings

 

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