Estimates for Cognizant Technology Solutions Corp. (CTSH) have been on the upswing after the company reported yet another strong quarter last week. Cognizant reported strong results for the third quarter of 2010 as both top and bottom-line beat expectations, which led to an upgrade in the annual guidance as well. Most analysts are optimistic of Cognizant’s prospects, as is evident from the estimate revisions following the release of the quarterly results.
Cognizant reported revenues of $1.217 billion in the third quarter of 2010, up 43% year over year and up 10.1% sequentially, exceeding the Zacks Consensus Estimate of $1.184 billion and management’s expectation of at least $1.175 million.
Net income came in at $203.7 million or 66 cents per share compared to net income of $172.2 million or 56 cents in the second quarter and net income of $136.6 million or 45 cents in the year-ago quarter. This beat the Zacks Consensus Estimate of 60 cents and management’s guidance of 59 cents.
The full coverage on the third quarter earnings is provided here.
Earnings Estimate Revisions: Overview
Following the release of strong results and consequent upgrade in guidance, estimate revisions depict a strong positive sentiment among analysts for the upcoming fourth quarter, fiscal 2010 and fiscal 2011 as well.
Agreement of Estimate Revisions
All the seventeen analysts covering the stock have upped their estimates for 2010 in the last thirty days. For the fourth quarter, fourteen of the sixteen analysts covering the stock have increased their estimates in the last thirty days and four have revised upward in the last seven days.
A vast majority of the analysts are positive for Cognizant’s performance in 2011 as well. Cognizant continues to benefit from the growth in discretionary spending driven by pent-up demand (which is nearing its end) which in turn was created by two years of cost-cutting and conservative spending. Growth in the near term will be driven by demand for traditional outsourcing across IT business process and infrastructure and new slate of domestic and international regulations, particularly in the financial services and health care industries. Financial services account for 43% of total revenues and health care industry accounts for 25% of total revenues.
Fourteen of the twenty analysts covering the stock have increased their estimates for 2011 in the last thirty days and four in the last seven days. However, one analyst moved in the opposite direction in the last thirty days and three in the last seven days.
Magnitude of Estimate Revisions
Not only is there a strong directional consensus among analysts covering the stock, the magnitude of increase in estimates is noteworthy as well. Earnings estimates for 2010 have gone up by 8 cents following the release of strong third quarter results. The current Zacks Consensus Estimate for 2010 is $2.36, roughly in line with the management’s guidance of $2.35. The Zacks Consensus Estimate for 2010 ranges from a low of $2.54 to a high of $2.87.
The current Zacks Consensus Estimate for 2011 is $2.66, up by 6 cents in the last thirty days.
Cognizant remains well diversified among financial services, health care & life sciences, retail, manufacturing and logistics, which have helped the company maintain its top line. As the economy begins to recover and business environment becomes stable, most companies will start investing more in development projects rather than just maintenance projects.
Cognizant has made significant investments in consulting and emerging markets, new solutions such as enterprise analytics, and new technologies such as cloud and mobile computing. These areas should drive growth in 2011 and the top-line should maintain momentum in the coming quarters. However, margins might be under a bit of pressure due to increased labor costs.
The stock has had a good run-up in recent times. Hence, we would like to wait for a more favorable entry point and, therefore, maintain a NEUTRAL recommendation for Cognizant supported by Zacks #3 Rank.