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Neutral on Cognizant

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

Earnings estimates for 2012 have inched up marginally in the last thirty days. Fourth quarter results beat the Zacks Consensus Estimate by a penny. Europe grew slower than the company expected in the back half of 2011 but demand remained solid throughout other geographies.

Cognizant remains well diversified among key verticals such as financial services, health care & life sciences, retail, manufacturing and logistics, which have helped the company to retain its top line.

Last month, Cognizant reported revenues of $1.66 billion in the fourth quarter of 2011, up 26.9% year over year and 3.9% sequentially. Revenues in 2011 amounted to $6.12 billion, an increase of 33.3% from 2010, marginally surpassing management’s expectation of $6.11 billion.

Management stated that Cognizant continues to see normal budget cycles in North America and Europe. IT and operations budgets in 2012 will remain flat with a slight upward bias in the U.S. as the recovery continues. However, growth will be muted in Europe.

Going forward, management expects revenues of at least $1.7 billion in the first quarter of 2012. EPS is projected at $0.79. Excluding stock-based compensation expenses, EPS is forecasted at $0.85.

Cognizant expects revenues of at least $7.53 billion. EPS is likely to be at least $3.43. Excluding $0.26 of estimated stock-based compensation expenses, EPS is forecasted at $3.69.

The company recently reshuffled its managerial team. Cognizant continues to set a robust tone going forward compared with competitors Infosys (INFY - Free Report) and Wipro (WIT - Free Report) . We expect the momentum to continue in the coming quarters as Cognizant continues to see solid demand for its services despite macroeconomic uncertainty, especially in Europe.

We continue to maintain a Neutral recommendation on Cognizant as of now and would wait for a pull back in stock price before turning positive.

Our Neutral recommendation is supported by Zacks #3 Rank, which translates into a short-term rating of Hold.

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