November 7, 2016 | 9:38 AM by Fahad Khalid | fkhalid@jaguaranalytics.com

Unlock: Cognizant Tech (CTSH) Cautiously Bullish View From Friday

It pays to do fundamental research. Here is cautiously bullish view we presented to clients last Friday on November 4. Stock is guided higher by +5%, making entry into large gap left behind from September. To learn more about our approach and how you can become a successful trader, sign up for 2 week trial and test drive live chat room with some of the best traders: SUBSCRIBE

November 4, 2016

Cognizant Tech (CTSH) – Sometimes the option activity is so significant that even when short term fundamental headwinds may look shaky, worth paying attention specially if bulls are positioning in leaps having time on their side after big sell off. That’s what we have here:

On Oct 26 – Buyer of 10,000 April 55 calls paid $2.40 offer
Today – Buyer of 10,000 April 55 calls pays $3.10 offer

Aggressive bull on 30 cents wide bid/ask spreads back to back in two weeks. Over $5.5 million call premium accumulated on 5x daily average call volume. Lets look at recent history of events:

Q2 Earnings on August 8 – Heading into earnings most investors were already expecting CTSH to cut guidance but the magnitude of announced reduction exceeded expectations. YoY organic growth now seen at +9.8% vs. +11% previous estimate. Management blamed on Brexit and “lower for longer” interest rates impact on bank and insurance client spend. Banking vertical was weak mostly in Europe but other verticals were strong and overall win rates remained at record high. CFO mentioned in the call the company is benefiting from the break-up of large scale legacy deals (Oracle being a loser) and increasing client demand in new technologies in analytics, cloud and mobile.

I would give Q2 earnings a grade of “B+”

Management Shake Up and Investigation on September 30 – A big negative surprise was announced that hammered the stock. First company filed an 8K with SEC “voluntarily” disclosing an internal investigation of accounting practice related to certain payments in India that may have violated US Foreign Corrupt Practices Act (FCPA). No further details were provided. May be they bribed somebody in India. Currently CTSH Audit Committee is looking at this time and I expect this be will top analyst question in earnings call on November 7 before market opens. Note since 2010 SEC has announced 86 FCPA settlement for average fine of $12 million. Nothing significant for a $31 billion IT giant like CTSH specially when it was started voluntarily. On the positive side, the same day CEO Coburn stepped down and was replaced by Raj Mehta, the most senior executive who has been with the firm since 1997 and is responsible for majority of key products and services build outs. Investors cheered that news and they should.

I would give this news a grade of “C.”

Bottom Line – The bar expectations of organic growth has been lowered. Bad management is out and accounting investigations is likely immaterial. Net net this has caused valuations to come down to 14.1x forward FY2017 PE vs. 3-year average of 18x.

CTSH Chart

#CTSH

Password must meet the following requirements: