Cognizant Technology Solutions: Can CTSH Stock Go to $90.00?

cognizant stockThis Activist Investor Says Cognizant Stock Can Gain About 70%  

Cognizant Technology Solutions Corp (NASDAQ:CTSH) hit the headlines on Monday when CTSH stock surged about seven percent on the news of Elliott Management Corporation sending a letter to the company, outlining its value-enhancement plan.

Elliott is the hedge fund run by billionaire investor Paul Singer and, according to the letter sent yesterday, the fund detailed value-creation measures that it believed could propel the stock by nearly 70% in just over a year. (Source: “Letter to Cognizant Technology Solutions Corp,” Elliott Management Corporation, November 28, 2016.)

Elliott is one of the top four shareholders in the company, and it said that one reason for the underperformance of Cognizant stock is that it follows a strategy developed nearly two decades ago, when revenues were over 200 times smaller, to keep operating margins in the 19%-20% range.

The activist investor also called for implementing a stock buyback plan as well as the initiation of dividend payment.  

Elliott’s plan is based on the need for fundamental operational improvements, efficient capital allocation, and effective oversight and incentive alignment. The fund said that CTSH stock could reach the levels of $80-$90+ per share by the end of 2017, which represents an upside of 50%-69% in just over a year. (Source: Ibid.)

Cognizant responded by saying that it welcomes open communication with all of its shareholders and values their input. The company had an introductory discussion with Elliott. Cognizant intends to review the letter carefully and will respond in due course.  

CTSH Stock Faces Major Headwinds

Cognizant is a $35.0-billion IT outsourcing firm that provides outsourcing, consulting, and technology services to the healthcare, financial services, manufacturing, and retail industries. Acquisitions have played an important role in the growth of the company. But the changing global IT industry has brought about lot of challenges.

In the latest quarterly results, the profit of the company had risen by 12% on account of higher demand in healthcare and financial services. However, it had lowered the high end of its revenue guidance range. Cognizant stock had fallen for a while before resuming its uptrend.

CTSH stock suffered a major blow in September following the company’s investigation into potential violations of the Foreign Corrupt Practices Act of 1977, which resulted in a downgrade by Citigroup Inc (NYSE:C). Last week, analysts at William Blair & Company, L.L.C. had downgraded its rating of Cognizant stock from “outperform” to “market perform.” 

Bank of America Merrill Lynch (owned by Bank of America Corp (NYSE:BAC)) had also downgraded Cognizant stock to “underperform” from “buy,” citing risks around potential changes to the H-1B visa program and a slower growth profile. (Source: “Bank Of America Cuts Cognizant’s Price Target From $66 To $48,” Benzinga, November 22, 2016.)

But here is a piece of news that confirms that the company is focusing on inorganic growth amid heightened macroeconomic uncertainties. News has just come in that Cognizant is set to acquire Mirabeau BV, a digital marketing and customer experience agency, which should help the company expand its digital expertise in the Netherlands and across Europe.

Amsterdam-based Mirabeau specializes in industries such as travel and hospitality, financial services, retail and business-to-business (B2B) sectors; and works with leading brands such as KLM Royal Dutch Airlines (owned by Air France KLM SA (ADR) (OTCMKTS:AFLYY)), ING Groep NV (ADR) (NYSE:ING), and Air France (also owned by Air France KLM SA (ADR) (OTCMKTS:AFLYY)).

With the close of the acquisition, approximately 260 specialists from Mirabeau will become a part of Cognizant’s Digital Business practice. (Source: “Cognizant to Acquire Digital Marketing and Customer Experience Agency Mirabeau BV,” Cognizant Technology Solutions Corp, November 29, 2016.)

Santosh Thomas, President, Global Growth Markets, Cognizant, said:

The future of the digital economy will be built on experience consumers have as they bank, stay healthy, insure their families, and move through the interconnected world. Companies in consumer-facing sectors are increasing their investments in interactive solutions to provide better, more personalized experiences to their customers.

The Mirabeau acquisition will help in further strengthening Cognizant’s ability to work with clients to identify important insights, develop strategies, and then design, prototype, and scale meaningful product and service experiences.

Cognizant Stock Looking for Growth Catalyst

Cognizant stock has lost about 12% in the year, whereas the S&P 500 has gained eight percent in the same time period. Amid the changing outsourcing industry, the company needs to bring about changes not only in its management team, but also in the way it does business as outlined by Elliott Management. CTSH stock is likely to be weighed down by such expectations.