Outsource to New Jersey

04/21/2006 12:00 am EST


Nicholas Vardy

Editor, Oxford Wealth Accelerator

Nick Vardy is new to the advisory world and has quickly become one of the industry's top performers. Focused on global investing, he notes "outsourcing is one of today's most important mega-trends." Surprisingly, his top outsourcing play comes from New Jersey.

"Dell's recent announcement that it is set to double its staff in India to 20,000 over the next three years has focused Wall Street's attention back on outsourcing. Yet, you may be surprised that Nasdaq-listed and Teaneck, New Jersey-based Cognizant Technology Solutions (CTSH NASDAQ) has built one of the world's most successful IT businesses exclusively on outsourcing to India.

"Spun off from Dun & Bradstreet a decade ago, Cognizant is a core long-term holding in the Indian IT services sector and the company best-positioned to profit from offshoring during the coming five years. Among its 67 strategic partners, Cognizant now counts seven of the world's top pharmaceutical companies and three of America's top five healthcare organizations.

"With more than 25,000 employees, Cognizant's sales offices are located throughout the developed world, while its development centers are spread throughout high-tech centers in India like Calcutta, Pune, Hyderabad and Bangalore. In the past five years, sales have leapt 44% annually, and the stock price more than matched that pace. Here's why we think Cognizant will continue to generate rich profits:

"First, the product cycle is strengthening due to technology relating to 3G, SOA software infrastructure, Microsoft's upcoming release of Vista operating system, and new storage solutions. This demand is expected to be supplemented by related vertical markets including communications, business services and health care. Second, Cognizant is on a growth path that has allowed it to consistently beat both earnings and revenue estimates.

"Full-year revenue was up 51% from 2004, and it's set to comfortably surpass $1.25 billion in 2006. The company went on a hiring blitz last year, and by the end of 2006, will have more than 34,500 employees, the bulk of whom are located in low-cost India. The firm is expected to grow at a rate of well over 30% per annum over the next three to five years. Despite having a forward P/E of 38, Cognizant has a PEG ratio (a formula that compares earnings growth to the P/E ratio) of just over 1.2, which is a very reasonable for a tech company of its size and growth prospects.

"Finally, Cognizant has gathered more accolades than any of its competitors. It was recently named one of Forbes' Best Small Companies in America for the fourth consecutive year, and ranked among the top information technology companies in Business Week's Hot Growth Companies. Institutional Investor magazine named Cognizant one of the most shareholder-friendly companies in America. The stock has been strong since our initial recommendation, and continues to show upward momentum, and recently rose on favorable comments from Goldman Sachs. However, we remain bullish and our price target is between $70 and $75."

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