Estimates Down for Cognizant

Earnings estimates for Cognizant Technologies Solutions (CTSH - Analyst Report) have declined of late after the company reported results for the first quarter of 2012.

Although results came in line with estimates, the outlook was disappointing. Cognizant trimmed its outlook for 2012 primarily due to a slower-than-anticipated acceleration in demand.

For full-year 2012, management expects revenues to rise at least 20% annually to $7.34 billion, down from its previous forecast of $7.53 billion. Earnings per share are likely to be $3.36, down from the previous estimate of $3.43. Excluding stock-based compensation expense, earnings per share are forecasted at $3.62, down from its earlier projection of $3.69.

Consequently, seventeen out of the nineteen analysts covering the stock decreased their estimates for 2012, leading to a $0.10 decline in estimates.

The current Zacks Consensus Estimate for 2012 is $3.37, down from $3.45 in the last thirty days. Earnings estimates for 2013 declined by $0.15 to $3.95 in the last thirty days.

The company anticipated somewhat soft and volatile European business in February but North America was expected to be normal. However, business was slower than expected in North America at the end of April. In particular, banking portion of the financial services segment and the pharmaceuticals portion of the healthcare segment were weaker than usual.

The pharmaceutical industry continues to experience a significant transformation due to the large number of drugs coming off-patent. This patent cliff has resulted in curtailment of discretionary spend, which in turn has impacted the growth rate.

The banking sector was weak due to softness among large North American clients, where there remains a heightened focus on cost optimization due to macroeconomic and regulatory pressures, which are driving fundamental changes in their business models.

Consequently, IT spend has been adversely impacted. Also, ramp in discretionary projects has been slower than expected among these larger clients.

Nevertheless, we believe Cognizant remains well diversified among key verticals, such as financial services, health care & life sciences, retail, manufacturing and logistics, which will in turn, facilitate it to retain its top line.

We continue to maintain a Neutral recommendation on Cognizant in the long-run. However, the near-term weakness forces us to have a Zacks #4 Rank, which translates into a short-term rating of Sell.