Neutral Kept on Cognizant

We recently reiterated our Neutral recommendation on Cognizant Technology Solutions Corporation (CTSH - Analyst Report).

Cognizant, which competes with peers like Infosys Technologies Limited (INFY - Analyst Report) and Wipro (WIT - Snapshot Report), is well positioned in the offshore market and continues to benefit from the secular trend toward offshore outsourcing.

Growth of traditional outsourcing continues to advance across IT business process and infrastructure, as clients continue to look for cost savings in order to fund growth and innovation in other areas. Cognizant sees a significant opportunity for offshoring activities in new geographic markets such as Europe, Asia Pacific, Latin America and the Middle East.

Moreover, many companies are increasingly opting for offshoring services beyond the traditional IT sourcing, namely BPO (Business Process Outsourcing), KPO (Knowledge process Outsourcing) and IT infrastructure services.

Cognizant is expanding its infrastructure in China as a part of its long-term focus and strategic investment. Though there is an element of uncertainty about the level of new economic activity in key markets, Cognizant believes that "offshoring," as a proportion of IT budgets, will continue to increase in the coming years.

Scale expansion into new regions and scope expansions into new processes represent a substantial opportunity for growth. Cognizant deepened its penetration within key industries and geographic markets in 2010 by adding 123 new clients and increasing the number of strategic clients by 22. (Strategic clients are defined as clients with the potential to contribute at least $5.0 million to more than $50.0 million in annual revenue).

During 2010, Cognizant saw a surge in discretionary spending resulting from the release of pent-up demand of two years when most clients underinvested in technology. This trend is expected to tail off over time. Nevertheless, we expect the momentum to continue in the coming quarters.  

Estimates for 2011 have inched up by $0.01 in the last seven days. We expect another strong quarter from the company along with positive revision to the 2011 guidance driven by improvement in technology spending. Budgets for 2011 are expected to see a surge driven by growth in outsourcing.

However, we would like to wait for a favorable entry point. Therefore, we maintain a NEUTRAL recommendation for Cognizant as of now. Our recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold.

Read the full analyst report on CTSH

Read the full analyst report on INFY

Read the full analyst report on WIT