Cognizant Technology Solutions Corporation (CTSH, Financial) provides professional information technology and consulting services to businesses across industries ranging from banking and manufacturing to entertainment and health care, with the main goal of using technology to achieve optimal business results and adapt in a fast-changing world.
There are three core pillars that define the solutions Cognizant offers to its clients: transform experiences, reimagine processes and modernize technology. These pillars can help businesses to generate growth and enhance their brand loyalty.
In addition to its admirable business mission, I belive Cognizant is a very attractive artificial intelligence (AI) opportunity for investors due to its low valuation, its positive trend of earnings and dividends growth and of course its new AI platform that has a lot of potential for increasing revenues and boosting profitability over the long term.
Total return prospects
Cognizant shares have moderate gains of just 9% year-to-date, despite the hype for AI stocks overall. Perhaps investors are still being cautions after the Covid stock bubble, when many who bought at the top learned that valuation matters in the long run, so buying tech stocks trading at very high ratios is not a great idea as the risk of a stock price retracement is high.
The good news is that Cognizant is very close to being considered dirt cheap now when we look at several key ratios. Looking at average estimates from Wall Street, the stock has a forward price-earnings ratio of 15.13, a forward enterprise-value-to-sales ratio of 1.57, a forward enterprise-value-to-Ebit ratio of 10.99 and a forward price-to-free-cash-flow ratio of 14.25. These are all lower than the sector medians for the information technology sector. One of the few valuation ratios that is not that great is the PEG ratio of 2.82, which indicates the company is not growing fast enough to match its valuation.
The company also compensates investors with ample shareholder returns as it repurchased 3.2 million shares for $200 million during the first quarter of 2023 under its share repurchase program, while also increasing its quarterly cash dividend to $0.29 per share, a 7% increase year-over-year, and furthermore. As of March 31, there was still $2.6 billion remaining under the share repurchase authorization. In total, Cognizant anticipates returning $1.4 billion to shareholders through share repurchases and dividends in 2023.
Taking all these metrics together, I consider that Cognizant has a lot of value that is not yet reflected in its stock price performance.
Solid fundamentals and growth
Cognizant has a robust balance sheet as its debt-to-equity ratio for the three months ending March 31 was only 0.05.
For the first quarter of 2023, revenue was $4.8 billion, which was down 0.3% year-over-year but up 1.5% on a constant currency basis.
The GAAP diluted EPS for the first quarter of 2023 was $1.14 compared to $1.07 for the first quarter of 2022. Looking at the longer term, the diluted EPS has risen from $3.6 back in full-year 2018 to $4.41 in 2022, which means that earnings have grown 6.5% per year over the past five years.
The company has achieved four consecutive years of dividend increases and has a very healthy forward payout ratio of 24.98%, meaning the dividend is likely safe.
It is great to see that the operating cash flow and free cash flow have both been very strong year-over-year. The operating cash flow increased to $729 million in the first quarter of 2023 versus $306 million for the year-ago quarter, and free cash flow increased to $631 million compared to $186 million. This positive trend in cash flows supports the potential for higher dividends over the next quarters.
AI platform helps businesses adopt AI at an enterprise scale
Cognizant has recently launched a new AI platform named Cognizant Neuro AI, which has a plethora of benefits for enterprises. According to the company, the main benefits include: “Discovering new business innovation vectors, creating pathways to differentiated customer and employee experiences, the ability to reimagine and digitize business processes, reliable governance, visibility, control and compliance, faster access to a holistic library of curated solutions and improved time to market at enterprise scale.”
The main goal of this new AI platform is twofold. One goal is to help businesses embrace AI to remain competitive, and the second is to achieve desirable business outcomes for Cognizant. The new platform has a lot of potential for driving higher revenues and profits for Cognizant due to the large variety of industries in which it is applicable.
Cognizant offers its services to industries like automotive, banking, capital markets, consumer goods, education, communications, media and technology. In addition, there is a wide variety of services ranging from digital experience, cloud solutions, security, software product engineering and business process services, just to name a few.
The new AI seems very versatile and has the potential to find a lot of business applications across many industries, which is very optimistic for Cognizant's future growth outlook.
