Where is the value price for CTSH?

The Technology sector has been a bright spot throughout the COVID-19 pandemic. One of the reasons the sector has led the market for most of the past year and a half is because so much of the shift to remote, work-from-home operations for corporate America, and contactless sales and delivery methods now being used by a lot of retail businesses is driven by technology solutions. That’s driven investors to flock to stocks that specialize in remote networking, conferencing and cloud-based solutions, including digital transaction handling and CRM services. Many of these companies have defied the broader economic trend and managed to post impressive results.

Cognizant Technology Solutions (CTSH) is a professional services company that works with companies in a variety of sectors that focuses on software development and digital platform engineering services for its clients. That puts CTSH in the IT Services industry, which is, at least in part, an area that has continued to see healthy demand as more companies have been forced to identify ways to use technology to shift their business focus. Economists are putting a big focus on companies with healthy balance sheets to help ride through any uncertainty that may extend into a longer-term period of time, and CTSH is company that looks to fit that bill as well. From its own bear market low at around $40, the stock rallied to a peak in December 2020 at around $83, dropped back and tested it again at the beginning of this month, but has dropped a little over -14% from that point to its current trading level at around $71.

As a value-focused investor, my natural inclination when I see a stock hitting a historical high, or driving to a new all-time high is a little different than most growth-oriented investors. Instead of assuming the stock will keep driving to new highs, I tend to question how much gas the stock has left. Of course, I recognize that the fact the stock is at a new high doesn’t automatically mean it is doomed to reverse; but it does prompt me to dive in to the company’s fundamentals to determine if there is a strong, business-based argument case to argue the stock should keep going higher. In the case of CTSH, the drop this month off of that 52-week high actually helps to increase the interest level in the stock as a potentially useful long-term investment. Let’s see where CTSH sits.

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 $37.4 billion.

Earnings and Sales Growth: Over the last twelve months, earnings were flat, but positive at 1.04%, while sales increased by about 4.17%. In the last quarter, earnings improved by 44.78% while Revenues were 5.19% higher. CTSH’s Net Income versus Revenue is healthy, at 9.09% over the last twelve months and strengthening to 11.47% in the last quarter.

Free Cash Flow: CTSH’s Free Cash Flow is healthy, at about $2.6 billion. That number decreased slightly from the quarter prior, when Free Cash Flow was $2.9 billion, but has also been pretty stable throughout the past year, when it was a little over $2.7 billion. The current number translates to a Free Cash Flow Yield of 6.94%.

Debt to Equity: CTSH has a debt/equity ratio of .06, which is extremely low and a good reflection of the company’s very conservative approach to leverage. Their balance sheet shows about $2.1 billion in cash and liquid assets against about $654 million in long-term debt. Their operating profile and high liquidity are good indications CTSH has the financial flexibility to adapt to ongoing changes in the markets it operates in.

Dividend: CTSH pays an annual dividend of $.96 per share, which at its current price translates to a dividend yield of about 1.35%. 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. It is also noteworthy that in the last quarter, CTSH’s dividend was $.88 per share.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at about $77 per share. That means that the stock is currently trading at a modest discount, with 8% upside from the stock’s current price. It also puts its “bargain price” at around $61.50 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above covers the last year and a half of price activity; the diagonal red line traces the stock’s upward trend from its March 2020 low around $40 to its December 2020 peak at around $83. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After dropping into March of this year, the stock retested its 52-high at the start of May, but has dropped back again and this week has found support in the $70 price area. Immediate resistance is at around $73. A push above $73 should have upside to about $77, while a drop below $70 should find next support at around $66.41 where the 38.2% retracement line waits.

Near-term Keys: The stock’s fundamentals are very strong, showing that CTSH has weathered the difficulties of the past year well; however the stock’s increase from its bear market low means that while there could be upside left, the bargain proposition isn’t attractive enough right now. It could also be 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 the stock may already be at or very near the top of its practical range. If you prefer to work with shorter-term trading strategies, you could use a break above the stock’s immediate resistance around $73 as a signal to buy the stock or work with call options, with a near-term exit target at around $77. There could also be a bearish opportunity, although you’d have to wait to see the stock fall below $70 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 $66.50 per share.

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