3 Near-Term Challenges For Cognizant That Elliott Didn't Highlight

Activist investor Elliot Management disclosed on Monday that it had a 4 percent stake in Cognizant Technology Solutions Corp CTSH, while challenging the company’s long held philosophies regarding margins and capital returns.

Bernstein’s Lisa Ellis maintained an Outperform rating on Cognizant, with a price target of $75.

Elliot’s Proposal

“In a 16-page letter to management, Elliott lays out a proposed plan the authors believe will achieve $4.95 in FY18 adjusted EPS, through a combination of margin expansion and capital returns,” Ellis mentioned.

The analyst agreed with Elliot Management’s view that Cognizant needs to relax its “black-and-white” on capital returns and margin expansion, while identifying a middle ground that is able to balance growth with “committed” cash returns.

Three Challenges

However, Ellis also believes there are three immediate challenges being faced by the company that should be given higher priority:

“1) influencing H1-B/L-1 visa reform – likely a 1H17 congressional agenda item, 2) pivoting the company to Digital – a once-every-20-years Enterprise IT transition that Cognizant can't afford to bungle, and 3) solidifying Cognizant's reputation and culture in the wake of the recently-disclosed corruption investigation and departure of Cognizant's President.”

Therefore, the analyst believes that Cognizant Technology, as well as Elliot Management, should focus on the less invasive and less risky aspects of the proposed plan from the investor to deliver maximum value.