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Elevator Pitch
My funding ranking for Cognizant Know-how Options Company (NASDAQ:CTSH) is a Maintain.
CTSH’s good inventory worth efficiency in 2023 was pushed by earnings beats, and higher consumer and worker metrics. However I believe that Cognizant’s inventory worth efficiency for 2024 will probably be flattish contemplating its valuations and income development prospects. As such, I’ve a Impartial view and Maintain ranking for Cognizant.
Firm Overview
CTSH describes itself as “a number one supplier of knowledge expertise, consulting, and enterprise course of companies” within the firm’s press releases.
A Snapshot Of Some Of Cognizant’s Clients And Providers Provided By CTSH
Cognizant’s Investor Briefing Slides
Within the third quarter of 2023, the Monetary Providers, Well being Sciences, Merchandise & Sources, and Communications, Media, & Know-how segments accounted for 30%, 29%, 24% and 17% of Cognizant’s income, respectively. With respect to geographic gross sales combine, CTSH generated 73%, 20%, and seven% of its prime line from North America, Europe and Remainder of World, respectively for the newest quarter. These numbers had been sourced from Cognizant’s Q3 2023 earnings presentation slides.
2023 Was A Nice Yr For CTSH
Each Cognizant’s share worth efficiency and monetary outcomes had been wonderful final 12 months.
CTSH’s inventory worth rose by +31.2% in 2023, and this was equal to a +650 foundation factors outperformance over the S&P 500. Cognizant’s consensus subsequent twelve months’ normalized P/E a number of additionally re-rated from 12.7 occasions as of January 3, 2023 (first buying and selling day of the 12 months) to 17.0 occasions on the finish of the prior 12 months as per S&P Capital IQ information. When it comes to its monetary efficiency, Cognizant achieved vital earnings beats of +6.0%, +11.4%, and +6.4%, for Q1 2023, Q2 2023, and Q3 2023, respectively.
Final 12 months, Cognizant named Ravi Kumar S, who had 20 years of working expertise at Infosys Restricted (INFY), as the corporate’s new CEO in January. CTSH subsequently introduced in February and March 2023 that Eric Branderiz, Nella Domenici, and Bram Schot had joined the corporate’s board. These three new administrators had related information within the areas of finance, technique and operations.
The administration and board adjustments had a optimistic affect on CTSH in some ways.
There was a considerable enchancment in attrition, a key working metric for Cognizant’s workers morale. Particularly, CTSH’s voluntary attrition fee for its expertise companies enterprise decreased meaningfully from 25.6% for the ultimate quarter of 2022 to 23.1%, 19.9%, and 16.2% in Q1 2023, Q2 2023, and Q3 2023, respectively as disclosed in its third quarter earnings presentation.
Cognizant revealed on the firm’s Q3 2023 outcomes briefing in November final 12 months that its newest yearly “consumer Web Promoter Rating survey which confirmed vital enchancment year-over-year and hit a historic excessive” for the corporate. It’s clear that CTSH’s consumer satisfaction has turn into higher in current occasions.
The corporate’s bookings grew by 9% from $23.1 million within the third quarter of 2022 to $26.9 million for Q3 2022. At the newest quarterly earnings name, CTSH highlighted that the rise in bookings within the newest quarter was the results of “bigger and longer-duration offers.”
In a nutshell, the positives regarding worker morale, buyer satisfaction, and bookings momentum have led to CTSH recording above-expectations outcomes and a +31.2% inventory worth appreciation within the prior 12 months.
2024 Isn’t Possible To Be As Good As Final Yr
I’m of the opinion that will probably be powerful for Cognizant’s inventory worth efficiency this 12 months to match what the corporate’s shares did in 2023. The truth is, I believe that CTSH’s shares will most probably be range-bound for 2024 contemplating these two key elements.
One key issue is that positives highlighted within the previous part have been factored into Cognizant’s valuations to a big extent.
The market presently values CTSH at a consensus subsequent twelve months’ normalized P/E ratio of 17.0 occasions. As a comparability, the Wall Road analysts’ consensus FY 2024-2027 normalized EPS CAGR is +16.8% (supply: S&P Capital IQ). This suggests that Cognizant is now buying and selling at a Value-to-Earnings Development or PEG of 1.01 occasions, and that’s indicative of honest valuation.
The opposite key issue is that the outlook for IT spending is combined based mostly on third-party analysis.
In its newest forecast launched on January 17, 2024, Gartner (IT) estimates that the expansion in international spend on data expertise will speed up from +3.3% final 12 months to +6.8% this 12 months. However Gartner additionally cautioned in its most up-to-date launch that “change fatigue” will stay a headwind in 2024 “with CIOs hesitating to signal new contracts, decide to long-term initiatives.”
The outcomes of an earlier survey printed in late-October 2023 by Statista confirmed that 66% of European and North American IT consumers surveyed proposed to “improve IT budgets” this 12 months. On the flip aspect, 63% and 84% of survey respondents expressed their considerations a couple of potential recession and a expertise crunch, respectively in the identical Statista survey.
It’s value noting that CTSH revised the higher restrict of its full-year FY 2023 prime line growth steering from +1.0% in August 2023 to flat in November final 12 months. The corporate famous at its most up-to-date quarterly earnings briefing that “financial uncertainty has elevated and discretionary spending has softened all through the final 3 quarters”, and confused that “that development” is “not stopping but.” It will likely be cheap to deduce that Cognizant’s income development momentum might probably be weaker going ahead.
Ultimate Ideas
A Maintain ranking for CTSH is justified. Cognizant’s shares are prone to commerce sideways this 12 months based mostly on my analysis of its prime line outlook and valuation metrics.
