Information Technology Stocks

Cognizant Technology Solutions Corp Valuation – January 2016 Update $CTSH

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – November 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Cognizant Technology Solutions Corp (CTSH) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Cognizant Technology Solutions Corporation is a provider of information technology (IT), consulting and business process services. The Company operates in four segments: Financial Services segment, which include banking and insurance; Healthcare segment, which includes healthcare and life sciences, and Manufacturing/Retail/Logistics segment, which includes manufacturing and logistics; retail, travel and hospitality, and consumer goods and Other segment, which includes Communications, Manufacturing/Retail/Logistics, and High Technology. The Companies competencies include business, process, operations and IT consulting, application development and systems integration, enterprise information management (EIM), application testing, application maintenance, IT infrastructure services (IT IS) and business process services (BPS). It provides a range of consulting, information technology and outsourcing services, including consulting and technology services, and outsourcing services.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of CTSH – January 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $37,055,992,602 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.40 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 318.89% Pass
6. Moderate PEmg Ratio PEmg < 20 27.28 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.26 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 3.40 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.18 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

CTSH value Chart January 2016

EPSmg $2.25
MG Growth Estimate 15.00%
MG Value $86.56
Opinion Undervalued
MG Value based on 3% Growth $32.60
MG Value based on 0% Growth $19.11
Market Implied Growth Rate 9.39%
Current Price $61.34
% of Intrinsic Value 70.86%

Cognizant Technology Solutions Corp qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the lack of dividends along with the high PEmg and PB ratios.  The Enterprising Investor is only initially concerned by the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.10 in 2011 to an estimated $2.25 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 9.39% annual earnings loss over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Cognizant Technology Solutions Corp (CTSH)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

CTSH Charts January 2016

Net Current Asset Value (NCAV) $6.20
Graham Number $29.59
PEmg 27.28
Current Ratio 3.40
PB Ratio 4.26
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Sep2015
Total Current Assets $7,237,900,000
Total Current Liabilities $2,128,400,000
Long-Term Debt $900,000,000
Total Assets $12,267,600,000
Intangible Assets $3,285,000,000
Total Liabilities $3,440,600,000
Shares Outstanding (Diluted Average) 612,700,000

Earnings Per Share History

Next Fiscal Year Estimate $2.68
Dec2014 $2.35
Dec2013 $2.02
Dec2012 $1.72
Dec2011 $1.43
Dec2010 $1.19
Dec2009 $0.89
Dec2008 $0.72
Dec2007 $0.58
Dec2006 $0.39
Dec2005 $0.28
Dec2004 $0.18
Dec2003 $0.11
Dec2002 $0.07
Dec2001 $0.05
Dec2000 $0.04
Dec1999 $0.02
Dec1998 $0.03

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.25
Dec2014 $1.94
Dec2013 $1.63
Dec2012 $1.36
Dec2011 $1.10
Dec2010 $0.88
Dec2009 $0.67
Dec2008 $0.52
Dec2007 $0.38
Dec2006 $0.26
Dec2005 $0.17
Dec2004 $0.11
Dec2003 $0.07
Dec2002 $0.05
Dec2001 $0.03
Dec2000 $0.02
Dec1999 $0.02

Recommended Reading:

Other ModernGraham posts about the company

8 Best Stocks For Value Investors This Week – 10/13/15
The 20 Best Stocks For Value Investors This Week – 7/25/15
Cognizant Technology Solutions Corp Analysis – July 2015 Update $CTSH
27 Companies in the Spotlight This Week – 4/4/15
Cognizant Technology Solutions Corp Quarterly Valuation – March 2015 $CTSH

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Cognizant Technology Solutions Corp Analysis – October 2015 Update $CTSH
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Akamai Technologies Inc. Analysis – August 2015 Update $AKAM

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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