CTSH has a value proposition that is worth your attention

If you’re looking for a sector of the economy that tends to lead the broad market higher or lower, a good place to start is Technology.

The Technology sector led the market lower throughout 2022, with a lot of Tech stocks extending their losses well past traditional bear market levels. That marked a distinct change from 2020 and 2021, when the shift to remote, work-from-home operations for corporate America, contactless sales and delivery methods now being used by a lot of retail businesses, and many of the safety protocols factories and production facilities were put in place, and are driven or enabled by technology solutions. That drove 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 defied the broader economic trend and managed to post impressive results even as the pandemic raged in 2020 and forced broad shutdowns and self-isolations.

With persistent pressures on chip production and supply that extended over more than the past three years, and are only now beginning to fade, and mixed with broader concerns coming from high inflation and continued, high interest rates, it should be no surprise that the market is off to an uncertain start so far this year. While the Tech sector hasn’t been immune from broad market uncertainty amid global economic pressures, many of the stocks that make up this industry, and the companies that drove the economy’s success in 2020 and 2021 continue to show healthy bottom-line results that the market didn’t factor into their stock prices last year. For some of these companies, 2023 has provided a rally point off of those lows, which has made selected Technology stocks winners so far this year.

Cognizant Technology Solutions (CTSH) is a professional services company that works with companies in a variety of sectors with a focus 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 operational and business focus. Economists and smart investors are likewise 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, despite experiencing its own pressures over the course of the last three years, looks to fit that bill. 

CTSH pushed to as high as $93.50 in March of 2022 before following the rest of the market into its own bear market, hitting its latest low at the start of November at around $51. The stock rallied from that low to a peak at around $70 in February. After dropping back to a march low at around $57, the stock has picked up gradual, bullish momentum, pushing the stock to its current level at around $62 per share. For bargain hunters, however the stock’s current price action begs the question of whether CTSH offers bargain hunters an attractive long-term opportunity to buy a good company at a nice price. Let’s dive in to the numbers and see what we can find.

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 $31.9 billion.

Earnings and Sales Growth: Over the last twelve months, earnings rose by 2.78%, while sales growth was flat, but negative at -0.29%. In the last quarter, earnings grew by 9.9% while Revenues growth was flat, but negative, at -0.56%. CTSH’s Net Income versus Revenue is healthy, at 11.88% over the last twelve months, and improving to 12.05% in the last quarter.

Free Cash Flow: CTSH’s Free Cash Flow is healthy, at about $2.7 billion. That number is up from last quarter’s mark at about $2.2 billion, as well as its $2.3 billion mark from a year ago. The current number translates to a Free Cash Flow Yield of 8.42%.

Debt to Equity: CTSH has a debt/equity ratio of .05, which is extremely low and a good reflection of the company’s very conservative approach to leverage. Their balance sheet shows about $2.5 billion in cash and liquid assets (down from $2.7 billion two quarters ago) against about $630 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. They are also using that flexibility to expand their digital services organically, through in-house research and development, and inorganically via acquisition.

Dividend: CTSH pays an annual dividend of $1.16 per share, which at its current price translates to a dividend yield of about 1.85%. That is modest, but it is also less than 25% 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 and reinforce the stability of the dividend itself. It is also noteworthy that in the early part of 2021, CTSH’s dividend was $.88 per share, and $.96 per share prior to the first quarter of 2022, and $1.08 to start 2023 when management announced the last dividend increase. An increasing dividend payout is an additional, strong sign of strength and management confidence.

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 $90 per share. That means that the stock is significantly undervalued, with 45% upside from the stock’s current price.

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 of price activity; the diagonal red line traces the stock’s downward slide to bear market territory from its May 2022 high at around $75.50 to its low, reached at the start of November at around $51. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock has been building bullish momentum since finding a major pivot low in March at around $57, and is now approaching immediate resistance at around $63.50 where the 50% retracement line sits. Current support is around $60.50, inline with the 38.2% retracement line. A push above $63.50 should see near-term upside to anywhere between $66 and $70, depending on the strength of buying activity, while a drop below $60.50 should find next support at around $57 per share.

Near-term Keys: The company’s fundamentals continue to be very strong, showing that CTSH has weathered the difficulties of the past three years well. The stock’s value proposition is still attractive, even with the stock’s rally over the last few months, and that is something that I think is worth noting as value seekers look for useful targets of opportunity. If you prefer to focus on short-term trading strategies, you could use a push above $63.50 as a signal to consider buying the stock or working with call options, with $66 offering a practical, near-term profit target and $70 possible if bullish momentum increases. A drop below $60.50, on the other hand could be a good signal to consider shorting the stock or buying put options, with an useful profit target at around $57 on a bearish trade.