RESEARCH NOTE
March 11, 2016
___________________________________________________________________ Cognizant Technology Solutions (CTSH: ~$56)
Addition to Buy List
Effective today we have added Cognizant Technology Solutions to the Buy List for the Managed Equity Growth
strategy. Cognizant is a global provider of information technology services that was spun off from Dun and
Bradstreet in 1996. The company operates through four segments: Financial Services, Healthcare,
Manufacturing/Retail/Logistics, and Other. The company’s consulting and technology services include IT
strategy consulting, program management, operations improvement, strategy consulting, application design and
development, systems integration, enterprise resource planning, and customer relations management services.
We believe the weak start to 2016 for Cognizant creates an attractive entry point for the stock. In recent quarters
CTSH traded lower in sympathy with weakness in the financial sector (42% of revenue) and ongoing
consolidation in the healthcare industry (26% of revenue), which resulted in a likely temporary deferment of IT
spending by many companies in these sectors. The overall financial services industry has been trending
downward due to sinking interest rates and concerns about the weakening macroeconomic backdrop in global
capital markets. Despite recent caution, the financial sector continues to be in the middle innings of a technology
upgrade cycle focused on regulatory and compliance, cyber security, and re-architecting legacy technology
infrastructure. Cognizant remains well positioned to capture more investment dollars in this sector in the years
to come as this upgrade unfolds.
Additionally, increased merger activity among Cognizant’s clients in the healthcare sector may have put
technology spending plans on hold in recent quarters. However, post-merger integration efforts frequently drive
increased spending on Cognizant’s services, so activity may pick up in the second half of 2016. The uncertainty
in these two verticals, which represent approximately two-thirds of the company’s revenue, led management to
issue very conservative guidance for the first half of 2016. Management projected revenue growth of 10% to
14% for 2016, which we feel may be overly conservative.
Despite recent weakness in these segments, the company delivered revenue growth of 21% and a non-GAAP
operating margin of 19.7% in 2015. Management has guided non-GAAP earnings in the range of $3.32 to $3.44
for the full year 2016. Under these cautious earnings assumptions the stock is trading near its three-year trough
on its price-to-earnings (P/E) multiple. We see this valuation as unwarranted due to our expectation that revenue
and earnings growth may reaccelerate in the second half of the year. We see a greater probability that global
macro concerns will ease in the coming quarters, which may lead financial companies to resume their needed
technology investments, while we expect a pick-up in post-merger integration spending in the healthcare sector.
Management raised its full-year guidance three times during 2015, and we would not be surprised to see a similar
pattern in the coming quarters as more clarity emerges from these two verticals.
Strategically, Cognizant consulting services seems to be well-positioned to benefit from the growth and
integration of “Next Generation” technology platforms such as mobility, cloud computing, software as a service,
social media, and "big data” into legacy technologies throughout corporate America. We are using a target price
on $70, which represents a P/E multiple of 20 on $3.50 per share in estimated earnings. We are also comforted
by the company’s $3.6 billion net cash position, which management could use to reduce the share count and boost
earnings in the coming quarters.
Please see back page for disclosures
Disclosures
Security Recommendations: The investments presented are examples of the securities held, bought and/or sold in the Capital Advisors
strategies during the last 12 months. These investments may not be representative of the current or future investments of those
strategies. You should not assume that investments in the securities identified in this presentation were or will be profitable. We will
furnish, upon your request, a list of all securities purchased, sold or held in the strategies during the 12 months preceding the date of
this presentation. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of
securities identified in this presentation. Capital Advisors, Inc., or one or more of its officers or employees, may have a position in the
securities presented, and may purchase or sell such securities from time to time. Additional information, including management fees
and expenses, is provided on Capital Advisors’ Form ADV Part 2.
As with any investment strategy, there is potential for profit as well as the possibility of loss. Capital Advisors does not guarantee
any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk (the
amount of which may vary significantly) and investment recommendations will not always be profitable. The investment return and
principal value of an investment will fluctuate so that an investor’s portfolio may be worth more or less than its original cost at any
given time. The underlying holdings of any presented portfolio are not federally or FDIC-insured and are not deposits or obligations
of, or guaranteed by, any financial institution.
Past performance is not a guarantee of future results. Capital Advisors, Inc. does not provide tax or legal advice and recommends
you consult with your tax and/or legal adviser for such guidance.
Please contact Capital Advisors for a list and description of all firm composites and/or copy of our most recent Form ADV Part 2:
1-866-230-5879
Presentation is prepared by: Capital Advisors, Inc. Copyright © 2016, by Capital Advisors, Inc. www.capitaladv.com