Information Technology Stocks

Cognizant Technology Solutions Corp Valuation – January 2019 $CTSH

Company Profile (excerpt from Reuters): Cognizant Technology Solutions Corporation, incorporated on April 6, 1988, is a professional services company. The Company operates through four segments: Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other. The Company’s services include consulting and technology services and outsourcing services. Its consulting and technology services include business, process, operations and technology consulting, application development and systems integrations, application testing, enterprise information management and software solutions and related services. Its outsourcing services include application maintenance, IT infrastructure services and business process services. The Company deploys a range of commercial and delivery models, including managed services, fixed bid, output and outcome based pricing and platforms to address the various needs of its customers.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of CTSH – January 2019

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 $39,333,372,216 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.24 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 146.00% Pass
6. Moderate PEmg Ratio PEmg < 20 23.65 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.59 Fail
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 3.24 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.10 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $2.87
MG Growth Estimate 7.26%
MG Value $66.09
Opinion Fairly Valued
MG Grade C+
MG Value based on 3% Growth $41.63
MG Value based on 0% Growth $24.41
Market Implied Growth Rate 7.58%
Current Price $67.92
% of Intrinsic Value 102.77%

Cognizant Technology Solutions Corp is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $1.94 in 2014 to an estimated $2.87 for 2018. This level of demonstrated earnings growth supports the market’s implied estimate of 7.58% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into Cognizant Technology Solutions Corp revealed the company was trading above its Graham Number of $37.96. The company pays a dividend of $0.45 per share, for a yield of 0.7% Its PEmg (price over earnings per share – ModernGraham) was 23.65, which was below the industry average of 44.74, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $7.64.

Cognizant Technology Solutions Corp receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $7.64
Graham Number $37.96
PEmg 23.65
Current Ratio 3.24
PB Ratio 3.59
Current Dividend $0.45
Dividend Yield 0.66%
Number of Consecutive Years of Dividend Growth 1

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2018
Total Current Assets $8,727,000,000
Total Current Liabilities $2,693,000,000
Long-Term Debt $624,000,000
Total Assets $15,274,000,000
Intangible Assets $4,058,000,000
Total Liabilities $4,296,000,000
Shares Outstanding (Diluted Average) 580,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.53
Dec2017 $2.53
Dec2016 $2.55
Dec2015 $2.65
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

EPSmg History
Next Fiscal Year Estimate $2.87
Dec2017 $2.50
Dec2016 $2.41
Dec2015 $2.24
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

Recommended Reading:

Other ModernGraham posts about the company

Cognizant Technology Solutions Corp – March 2018 $CTSH
12 Best Stocks For Value Investors This Week – 7/1/16
Cognizant Technology Solutions Corp Valuation – July 2016 $CTSH
18 Best Stocks For Value Investors This Week – 1/30/16
Cognizant Technology Solutions Corp Valuation – January 2016 Update $CTSH

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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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