Trade concerns have put investors on edge in general, which has led a number of industries to drift, or start move a bit lower. Industrial and Technology stocks, not surprisingly have been among the biggest movers as trade rumors ebb and flow, but indications that there may be progress are encouraging, including a new, 90-day extension of a temporary general license to buy components from U.S. tech companies that was scheduled to expire on Monday and was confirmed by the U.S. Commerce Secretary this weekend.
Trade progress – especially as it relates to the tech sector – should be good for tech companies in general; which includes Information Technology companies like Cognizant Technology Solutions (CTSH). We used this stock for a put sale in June that expired worthless, and the stock is actually a bit lower than the level used in June; that opens up the opportunity for a new put sale for this month’s issue.
The stock’s trend belies both the company’s underlying fundamental strength and the trend for its industry, putting CTSH in the category of one of the biggest losers in the stock market of the past year. Even after rebounding from May and into the beginning of August, the stock remains down a little over -21% over the past year. That includes a drop from a near-term peak on August 1 at around $66.50 per share. The stock is bit above the lows it established in May, but is still down at levels that appear to offer an interesting long-term opportunity.
Fundamental and Value Profile
Cognizant Technology Solutions Corporation is a professional services company. The Company operates through four segments: Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other. The Financial Services segment includes customers providing banking/transaction processing, capital markets and insurance services. The Healthcare segment includes healthcare providers and payers, as well as life sciences customers, including pharmaceutical, biotech and medical device companies. The Manufacturing/Retail/Logistics segment includes manufacturers, retailers, travel and other hospitality customers, as well as customers providing logistics services. The Other segment includes its information, media and entertainment services, communications and high technology operating segments. Its services include consulting and technology services and outsourcing services. Its outsourcing services include application maintenance, IT infrastructure services and business process services. CTSH has a current market cap of $33.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by -14.5%, while sales increased by about 4%. In the last quarter, earnings improved by 3% while Revenues were mostly flat, but also positive by about .75%. The negative earnings pattern over the last year, with a turn to positive in the last quarter, could be a sign of a turnaround in an area that has been one of the primary reasons for the stock’s underperformance over the last year. CTSH’s Net Income versus Revenue is healthy and appears to confirm the turnaround, running 12.6% over the last twelve months and at 12.2% in the last quarter. In the quarter prior, the difference from the trailing twelve month number to the last quarter was about -20%, which means this is a useful, improving characteristic.
Free Cash Flow: CTSH’s Free Cash Flow is healthy, at a little more than $2 billion. That translates to a Free Cash Flow Yield of 5.95%.
Debt to Equity: CTSH has a debt/equity ratio of .13, which is a good reflection of the company’s conservative approach to leverage. Their balance sheet shows about $3 billion in cash and liquid assets against a little less than $1.4 billion in long-term debt. These are strongly positive indicators that give the company excellent liquidity and financial flexibility to adapt to ongoing changes in the markets it operates in.
Dividend: CTSH pays an annual dividend of $.80 per share, which at its current price translates to a dividend yield of about 1.27%. That is modest, but it is also much less than 50% of the stock’s earnings per share over the last twelve months – a conservative payout ratio that actually helps bolster the company’s balance sheet strength.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CTSH is $19.11 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.21 against a historical average of 3.76, which puts the stock’s “fair” value at about $72 per share. That’s only about 17% away from the stock’s current price, which isn’t bad, but not quite compelling as a value-based metric; however the stock is also trading about 34% below its historical Price/Cash Flow ratio, which offers a top-end, long-term target price a little above $82 per share – which is very attractive.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: In the last month, the stock hit a short-term high at around $67 per share before dropping back to a low around $59. The stock has rallied in the last few days leading into the Labor Day holiday to push near to immediate resistance at around $62. If the stock can break above $62, it should see short-term momentum that could push the stock into the $67 to $68 range fairly quickly. A drop below its nearest support around $59 should see the stock test the $56 range, which is around its multiyear low point that was established in May of this year.
Near-term Keys: The stock’s fundamentals are strong, and overall the bargain proposition is appealing; however it is worth noting that industry analysts right now are forecasting stagnant to tepid growth in revenues and profits for the company for the next year or so, which means that while the stock looks attractive from a valuation standpoint, a push back near to its all-time highs is likely to be an extended, very long-term prospect. If you prefer to work with shorter-term trading strategies, you could use a break above the stock’s immediate resistance at about $62 as a signal to buy the stock or work with call options, with a near-term exit target at around $67.50. There could also be a bearish opportunity, although you’d have to wait to see the stock push below $59 to see a good signal for a bearish opportunity to short the stock or to buy put options. In that case, the exit target would be around $56 per share, and if the bearish momentum persists, you may be able to extend that trade to around $51.