CTSH Stock Study (5-8-23)

I recently did a stock study on Cognizant Technology Solns Corp. (CTSH) with a closing price of $63.29. A previous study on this company was done here.

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. Cognizant employs nearly 300,000 people
     > globally, roughly 70% of whom are in India, although the
     > company’s headquarters are in Teaneck, New Jersey.

Over the last 10 years, this large-size company has grown sales and EPS at annualized rates of 8.5% and 7.4%, respectively. Lines are mostly up and parallel except for a sales dip in ’20 and some rockiness in EPS (down in ’16, ’17, ’19, and ’20). PTPM has been above peer and industry averages despite trending down from 19.1% in ’13 to 15.5% in ’22 with a last-5-year average of 15.2%.

ROE trails peer and industry averages over the last decade ranging from 12.2% in ’20 to 21.7% in ’13 with a last-5-year average of 17.1%. Despite increasing from 0% in ’13 to 11.1% in ’22, Debt-to-Capital is far lower than peers and the industry with a last-5-year average of 11.3%. Interest Coverage is over 100, Quick Ratio is 1.87, M* gives a Standard rating for Capital Allocation, and Value Line gives an A+ grade for Financial Strength.

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

• CNN Business projects 2.3% YOY contraction and 3.0% growth per year for ’23 and ’22-’24 (based on 22 analysts).
• YF projects YOY growth of 0.3% and 5.3% for ’23 and ’24, respectively (27).
• Zacks projects YOY 0.2% contraction and 4.9% growth for ’23 and ’24, respectively (5).
• Value Line projects 4.7% annualized growth from ’22-’27.
• CFRA projects growth of 0.5% YOY and 2.7% per year for ’23 and ’22-’24, respectively.
• M* offers a 2-year ACE of 2.9% growth per year and projects 9.0% annualized growth x5 years in its analyst note.

I am forecasting below both long-term estimates.

I forecast long-term annualized EPS growth of 4% based on the following:

• CNN Business reports ACE of 0.5% YOY and 2.5% per year for ’23 and ’22-’24, respectively (based on 22 analysts), along with 5-year annualized growth of 4.0%.
• MarketWatch projects 2.8% and 4.8% per year for ’22-’24 and ’22-’25, respectively (28).
• Nasdaq.com projects 9.5% YOY and 8.2% per year for ’24 and ’23-’25 (6, 9, and 5 analysts for ’23, ’24 and ’25).
• YF projects YOY 1.8% contraction and 9.0% growth for ’23 and ’24, respectively (27), along with 5.4% annualized growth for the next five years.
• Zacks projects YOY 0.9% contraction and 7.8% growth for ’23 and ’24, respectively (9), along with 11.0% annualized growth for the next five years.
• Value Line projects 8.1% growth per year from ’22-’27.
• CFRA projects 2.6% YOY contraction and 3.4% growth per year for ’23 and ’22-’24, respectively, along with a 3-year annualized CAGR of 6.0%.
• M* projects long-term growth of 10.1%.

I am forecasting at the bottom of the long-term-estimate range (mean of six: 7.6%).

My Forecast High P/E is 21. Over the last 10 years, high P/E has ranged from 21.2 in ’22 to 32.2 in ’20 with a 5-year average of 24.4. I am forecasting just below the range.

My Forecast Low P/E is 11. Over the last 10 years, low P/E has ranged from 11.6 in ’22 to 20.4 in ’17 with a 5-year average of 15.5. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) is the default value of $49.50. This is 21.8% less than the previous close and 3.5% less than the ’22 low.

Since a dividend was issued in 2017, Payout Ratio has ranged from 17.8% in ’17 to 34.2% in ’20 with a last-5-year average of 25.8%. I am forecasting below the range at 17.0%.

These inputs land CTSH in the BUY zone with an U/D ratio of 3.7. Total Annualized Return (TAR) is 13.4%.

PAR (using Forecast Average–not High–P/E) is 7.7%, which is less than I seek in a large-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 356 studies done in the past 90 days (my study along with 94 other outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.1%, 8.0%, 22.5, 16.0, and 17.9%. I am lower across the board. Value Line projects a future average annual P/E of 17.0, which is lower than MS (19.3) and higher than mine (16.0). MOS backing the current study seems robust.

With regard to other data, MS high and low EPS are $6.49/share and $3.69/share compared to my $5.46 and $4.50. The $4.50 may be higher due to recent quarterly growth. The $5.46 is lower due to a lower forecast growth rate. The MS LSPF of $51.30 is 3.6% greater than mine, is 13.1% less than the $3.69 * 16.0 = $59.04 default value, and implies a Forecast Low P/E of 13.9 (vs. 16.9).

I would look to BUY CTSH under $65/share.