Outsourcing and e-Business Boost Cognizant

12/03/2015 7:00 am EST

Focus: STOCKS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Our latest featured recommendation was founded in 1994 as a part of Dun & Bradstreet; today, it is one of the largest providers of technology, consulting, and business process outsourcing services in the world, explains Nicholas Vardy, editor of The Alpha Investor Letter.

Like many IT services firms, New Jersey-based Cognizant Technology Solutions (CTSH) is based on an offshore, outsourcing business model.

While eight out of ten dollars it earns come from North America, Cognizant has more than 150,000 employees globally, of which more than 100,000 workers are in India.

In addition, Cognizant has nine US delivery centers, as well as additional global delivery centers in the UK, Hungary, China, the Philippines, Canada, Brazil, Argentina, and Mexico.

There are many reasons to think the IT services sector will continue to expand at better-than-currently-forecast rates.

First, there is the explosion of government regulation. Cognizant is well positioned in this regard, as its two largest sources of revenue are financial services regulation (42%) and healthcare services (26%), both of which have become even more complicated due to Dodd-Frank and Obamacare.

Second, a long-term driver of future IT spending is a massive trend toward e-business alongside a migration to the Cloud.

Most companies simply do not have the in-house staff to support such a move and need outside firms to provide solutions.

Cognizant stock strongly has outperformed the broader S&P 500 in 2015. So far in 2015, Cognizant stock has risen by 34%. By way of comparison, the S&P 500 IT Services Index only rose by 8%.

Cognizant has steadily posted double-digit percentage growth in its revenue and profits. Over the past five years, it has generated a compound annual growth rate of approximately 26% on revenues, 22% on operating income, and 20% on net income.

Further global expansion and acquisitions will allow the company to maintain this growth level at around 15%.

The company also has demonstrated a track record of consistently beating both earnings and revenue estimates. It is a stock that rarely disappoints.

Cognizant is also steadily buying back its stock, always a bullish sign. That reflects the confidence in its business, commitment to drive shareholder value, and ability to generate strong cash flows.

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