CTSH Stock Study (1-19-23)

I recently did a stock study on Cognizant Technology Solutions (CTSH) with a closing price of $60.99.

Since 2012, this large-sized company has grown sales and EPS at annualized rates of 10.2% and 7.5%, respectively. Lines are mostly up, straight, and parallel with some rockiness in EPS (down in ’16, ’17, ’19, and ’20). PTPM has trended lower over that timeframe with a 5-year average of 15.7%. This leads peer (stated as LDOS and CDW) and industry averages.

ROE has also trended lower with a last-5-year average of 16%. This trails peer and industry averages. Debt-to-capital averages 10.6% over the last five years, which is far below peer and industry averages. Interest Coverage is a whopping 234.

M* writes:

     > Cognizant is a global IT services provider, offering consulting and
     > outsourcing services to some of the world’s largest enterprises spanning
     > the financial services, media and communications, healthcare, natural
     > resources, and consumer products industries.

I assume long-term annualized sales growth of 4% based on the following:

• CNN Business projects growth of 4.9% YOY and 4.2% per year for ’22 and ’21-’23, respectively (based on 23 analysts).
• YF projects 4.6% and 3.9% YOY growth for ’22 and ’23, respectively (26).
• Zacks projects 4.5% and 3.3% YOY growth for ’22 and ’23, respectively (7).
• CFRA projects growth of 4.5% YOY and 4.8% per year for ’22 and ’21-’23, respectively.
• Value Line projects 5.8% annualized growth from ’21-’26.
• M* offers a 2-year ACE of 4.7% per year.

I assume long-term annualized EPS growth of 6% based on the following:

• CNN Business reports ACE of 7.5% YOY and 6.6% per year growth for ’22 and ’21-’23, respectively (based on 23 analysts).
• MarketWatch projects growth of 7.5% and 7.7% per year for ’21-’23 and ’21-’24, respectively (28).
• Nasdaq.com projects 6.1% YOY growth and 7.3% growth per year for ’23 and ’22-’24, respectively (3, 10, and 6 analysts for ’22, ’23, and ’24).
• YF projects 7.6% growth for ’22, 6.6% growth for ’23, and 5.4% annualized growth for the next five years (25).
• Zacks projects 7.8% growth for ’22, 5.6% growth for ’23, and 11% annualized growth for the next five years (7).
• Value Line projects 7.4% growth per year from ’21-’26.
• CFRA projects 7.5% YOY growth for ’22, 8.6% growth per year for ’21-’23, and 3-year EPS annualized growth of 7%.

I project a future High P/E of 20. High P/E has ranged from 22.2 (’21) to 32.2 (’20) over the last 10 years with a 5-year average of 26.2.

I project a future Low P/E of 12. Low P/E has ranged from 15.1 (’13) to 20.4 (’17) with a 5-year average of 17.2.

I project a future low price of $45. The default price of $54 is only 11% below the previous closing price; the rule of thumb is to go at least 20% below. The 52-week low ($51) is 16% less and the 2020 low ($40) is 34% less. I am choosing a number in the middle of these two (26.2% less).

All this results in an U/D ratio of 3.2, which puts CTSH in the Buy zone. CAR (using forecast High P/E) is 15.1%.

Payout Ratio has a last-5-year average of 24.5% (range 17.8% to 34.2%). I’m using 17% to be conservative.

PAR, which uses projected average P/E, is 10.4%: not terrible for a large company.

Let’s look at Member Sentiment (MS) to assess margin of safety (MOS). Based on 428 studies over the past 90 days, averages for projected sales growth, projected EPS growth, High P/E, and Low P/E are 7.4%, 9.2%, 22.7, and 16, respectively. I’m lower on all inputs. I also further lowered projected Low Price, which in effect is lowering my forecast Low P/E. I’m lower than MS average low price of $50.79. As a final check, Value Line projects an average annual P/E of 17. I’m lower at 16.

As my study appears to have a healthy MOS, I feel comfortable with a Buy up to $63/share.