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What's in Store for Cognizant (CTSH) this Earnings Season?

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Cognizant Technology Solutions Corp (CTSH - Free Report) is set to report second-quarter 2017 results on Aug 3. In the trailing four quarters, the company has beat the Zacks Consensus Estimate in three occasions, with an average positive surprise of 5.06%.

Last quarter, Cognizant delivered a positive earnings surprise of 5.33%. Revenues of $3.546 billion beat the Zacks Consensus Estimate of $3.522 billion and grew 10.7% on a year-over-year basis.

For the second quarter of 2017, Cognizant expects revenues in the range of $3.63–$3.68 billion. Non-GAAP earnings are expected to be 89 cents per share.

Shares of Cognizant have gained 48.5% year to date, significantly outperforming the industry’s 18.2% rally.

Let’s see how things are shaping up for this announcement.

Factors at Play

Cognizant is consistently developing its capabilities to benefit from the ongoing digital transition, especially when it comes to integration of the new digital framework with legacy technology platforms. Accretive acquisitions have been a key catalyst in this regard.

Over the past few years, Cognizant outpaced its Tier-1 peers on account of more exposure to fast-growing verticals like Financial Services and Healthcare. High quality, lower cost technology services and strategic partnership with the likes of Microsoft (MSFT - Free Report) and SAP SE are also big positives for the company.

Moreover, Cognizant’s expansion into Latin America with the opening of the new center in Sao Paulo, Brazil is positive for the company’s top-line growth. Further, lower share count due to aggressive share buyback is expected to drive earnings in the going-to-be reported quarter.

However, the company is witnessing some sluggishness of late in the healthcare and financial sector. Stiff competition from peers like Accenture, Infosys and Wipro is a major concern.

Moreover, second-quarter earnings is expected to be negatively impacted by additional costs related to severance (including voluntary separation program) lease termination and other facility-related shutdown costs as well as higher advisory fees.

Earnings Whispers

However, our proven model does not conclusively show that Cognizant is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Cognizant’s Earnings ESP is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 82 cents per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Cognizant carries a Zacks Rank #3, which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 and 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some stocks which, as per our model, have the right combination of elements to post an earnings beat this quarter:

CACI International (CACI - Free Report) has an Earnings ESP of +1.83% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

NetEase (NTES - Free Report) has an Earnings ESP of +0.25% and holds a Zacks Rank #2.

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