Cognizant Technology Solutions fares quite well in the ModernGraham model, and is suitable for Enterprising Investors. The Defensive Investor is concerned with the lack of dividends along with the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned by the lack of dividends. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $0.88 in 2010 to an estimated $2.01 for 2014. This is a fairly strong level of demonstrated growth which is well above the market’s implied estimate for 9.24% earnings growth over the next 7-10 years. Here, the historical growth in EPSmg over the last five years is around 25.6% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but it may be unrealistic that the company would see such a significant slowdown in growth over the long term. Therefore, the model returns an estimate of intrinsic value above the current price, indicating the company is significantly undervalued at the present time.
Disclaimer: The author did not hold a position in Cognizant Technology Solutions (CTSH) at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.