Information technology outsourcing specialist Cognizant Technology (NASDAQ: CTSH) broke resistance at $78 to hit an all-time high on March 25 and recorded a 9% gain for the first quarter of this year. That is three times the return of its peers in U.S. technology, double the broad U.S. market and a mirror image of the -9% loss of the broad Indian market, where many of its peers are based.
Though Cognizant stock has rolled back a bit after topping out about $82 on April 1, I am still very bullish on this top stock to buy for 2011.
Cognizant is based in northern New Jersey, but it’s really one of a new breed of hybrid companies whose employees are primarily in India. Lower wages there allow it to relentlessly cut the IT costs of the many U.S. and European customers that it serves, which is why it has steadily gained share in recent years from companies’ in-house technology departments.
I expect the upside to continue. The Economic Times, an Indian business journal, reported a few weeks back that the country’s five big IT services companies are on a hiring spree, adding 1.14 million new workers in the past year — up 25x from the 46,462 added in the prior year. Cognizant added the fewest of those; net additions rose to 25,557 in 2010 from 16,700 in 2009.
The Economic Times said its research showed that companies are not just compensating for a lull in hiring during the recession, but are anticipating bigger and more valuable projects in coming months and want to build up their bench strength.
And about a month ago, Cognizant announced that it would invest more than $500 million during the next four years to add 8 million square feet of new office campuses for new employees in four cities: Chennai, Pune, Coimbatore and Kolkata (formerly known as Calcutta).
Kaufman Bros. reiterated Cognizant shares at the end of March with a target of $90, up from its previous target of $71. Goldman Sachs named the company as one of its top IT picks for 2011 last week as well.
Cognizant specializes in technology consulting, complex system development and integration, enterprise software implementation and maintenance, data warehousing, business analytics, application testing, infrastructure management and business process outsourcing. It focuses on large customers in financial services, health care, manufacturing, retail and logistics.
Companies’ intensifying efforts to move technology and storage to the “cloud,” as well as mergers, have brought tremendous new opportunities to outsourcing IT companies like Cognizant.
Quarterly results were last reported on Feb. 7. The company said it earned $0.66 per share in the prior quarter, beating estimates by a penny. That was up from $0.47 in earnings per share in the comparable quarter a year before. Revenue was up 45.2% year over year. Analysts expect CTSH to earn $2.72 in fiscal 2011 and $3.28 in fiscal 2012. I suspect that’s low by around 3% to 5%.
If the company earns $3.44 and it continues to deserve a premium price/earnings multiple of around 30x, then it will trade at around $103 in a year, or 28% higher than the current price. It’s still a buy and my top pick for investors focused on global large-cap stocks.
Check out the other FREE stock picks that make up InvestorPlace.com’s Top 10 Stocks for 2011.
