CTSH Stock Study (7-31-23)

Posted by Mark on August 25, 2023 at 07:07 | Last modified: July 31, 2023 12:01

I recently did a stock study on Cognizant Technology Solns Corp. (CTSH) with a closing price of $65.76. Previous studies are here and 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 past decade, 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 EPS rockiness (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 mean of 15.2%.

Also over the past decade, ROE trails peer and industry averages ranging from 12.2% in ’20 to 21.7% in ’13 with a last-5-year mean of 17.0%. Despite increasing from 0% in ’13 to 11.1% in ’22, Debt-to-Capital is much less than peers and the industry with a last-5-year mean of 11.3%.

M* gives a “Standard” rating for Capital Allocation while Value Line gives an A+ grade for Financial Strength. Interest Coverage is over 117 and Quick Ratio is 1.87.

With regard to sales growth:

• CNN Business projects 0.5% YOY and 2.5% growth per year for ’23 and ’22-’24 (based on 24 analysts).
• YF projects YOY growth of 0.2% and 4.7% for ’23 and ’24, respectively (27 analysts).
• Zacks projects YOY 0.1% contraction and 4.3% growth for ’23 and ’24, respectively (7).
• 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.
• M* provides a 2-year CAGR of 2.9% and projects 5-year annualized growth of 9.0% in its analyst note.

I am forecasting below both long-term estimates at 4.0% per year.

With regard to EPS growth:

• CNN Business reports ACE of 3.4% YOY contraction and 2.7% growth per year for ’23 and ’22-’24, respectively (based on 24 analysts), along with 5-year annualized growth of 5.0%.
• MarketWatch projects annualized growth of 2.3% and 4.7% for ’22-’24 and ’22-’25, respectively (29 analysts).
• Nasdaq.com projects growth of 7.0% YOY and 8.3%/year for ’24 and ’23-’25 (10, 9, and 5 analysts for ’23, ’24 and ’25).
• Seeking Alpha projects 4-year annualized growth of 7.7%.
• YF projects YOY 3.0% contraction and 8.4% growth for ’23 and ’24, respectively (25), along with 5.4% annualized growth for the next five years.
• Zacks projects YOY 2.1% contraction and 6.7% 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 2.7% YOY contraction and 3.4% growth per year for ’23 and ’22-’24 along with a 3-year CAGR of 6.0%.
• M* projects long-term growth of 10.1%.

My 5.0% forecast is at the bottom of the long-term-estimate range (mean of six: 7.9%). I will use ’22 EPS of $4.41/share as the initial value rather than ’23 Q1 EPS of $4.49 (annualized).

My Forecast High P/E is 21.0. Over the past decade, high P/E has ranged from 21.2 in ’22 to 32.2 in ’20 with a last-5-year mean of 24.4. I am forecasting just below the range. The last-5-year-mean average P/E is 19.9.

My Forecast Low P/E is 11.0. Over the past decade, low P/E has ranged from 11.6 in ’22 to 20.4 in ’17 with a last-5-year mean of 15.5. I am forecasting below the range.

My Low Stock Price Forecast (LSPF) of $48.50 is the default value based on $4.49/share initial value. This is 26.2% less than the previous close and 5.5% less than the ’22 [and 52-week] 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 mean of 25.8%. I am forecasting below the range at 17.0%.

These inputs land CTSH in the BUY zone with a U/D ratio of 3.0. Total Annualized Return (TAR) is 13.3%.

PAR (using Forecast Average—not High—P/E) is 7.6%, 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 346 studies done in the past 90 days (my study and 77 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 6.6%, 8.1%, 22.5, 15.9, and 17.0%. I am at or lower than each. Value Line projects a future average annual P/E of 17.0, which is lower than MS (19.4) and higher than mine (16.0).

MS high / low EPS is $6.52 / $3.69 vs. my $5.63 / $4.41 (per share). My high EPS is lower due to a lower growth rate. I am confused why MS $3.69/share is so low. ’22 and ’21 annual EPS are both higher. I have to go back to Q4 2020 to find the most recent quarterly report that low. Although my EPS range is still slightly lower, I almost think MS low EPS is too extreme.

MS LSPF of $50.60 implies a Forecast Low P/E of 13.7 vs. the above-stated 15.9. MS LSPF is 13.8% less than the default $3.69/share * 15.9 = $58.67, which results in more conservative zoning. MS LSPF remains 4.3% greater than mine.

MOS backing the current study seems robust. My TAR is also less than MS 17.9% and really, I’d like TAR to be at least 15.0%.

I track a few different valuation metrics. PEG is 1.4 (Zacks) or 2.8 (overvalued using my forward P/E). Relative Value [(current P/E) / 5-year-mean average P/E] is undervalued at 0.73 (M*). Kim Butcher’s “quick and dirty DCF” prices the stock at 15.5 * [$8.00 – ($1.60 + $1.00)] = $83.70 thereby suggesting the stock to be undervalued by 21.0%.

I would look to BUY the stock under $64/share (greater TAR).

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