Cognizant Tech Solutions-A (NASDAQ:CTSH) Presents a Compelling Case for Value Investors

Investors using a value-oriented method often look for companies trading below their intrinsic worth while having solid underlying fundamentals. The "Decent Value" screening method focuses on finding such opportunities by giving priority to stocks with strong valuation ratings, typically scores above 7 out of 10, while also requiring acceptable scores in profitability, financial health, and growth. This balanced method helps avoid classic value traps by confirming a company is not just inexpensive, but also fundamentally sound. Cognizant Technology Solutions Corp. (NASDAQ:CTSH) appears as a candidate fitting this strategy, presenting a case for being undervalued relative to its financial strengths.

Valuation Metrics

A fundamental part of value investing is purchasing assets for less than their estimated intrinsic value. Cognizant's valuation metrics suggest it may be trading at a discount compared to both its industry and the wider market. The company's fundamental report points out several key items indicating attractive pricing:

• Price-to-Earnings (P/E) Ratio: At 13.40, CTSH's P/E ratio is much lower than the S&P 500 average of 27.32. More importantly, it is less expensive than about 83% of its peers in the competitive IT Services industry, where the average P/E is near 59.
• Forward P/E Ratio: The forward P/E of 11.85 supports this undervaluation, being lower than the S&P 500 average and again placing it in the more affordable part of its industry.
• Enterprise Value to EBITDA and Price/Free Cash Flow: These multiples also show a reasonably priced stock. The analysis indicates CTSH is less expensive than over 85% of its industry based on Enterprise Value/EBITDA and less expensive than 80% based on its Price/Free Cash Flow ratio.

For a value investor, these metrics are important as they give a quantitative basis for evaluating whether a margin of safety exists. A low P/E ratio relative to historical averages, sector peers, and the market can indicate that a stock is undervalued, assuming the company's earnings are stable or increasing.

Financial Health

Value investing requires a strong balance sheet to endure economic downturns and avoid the risks linked to high debt. Cognizant's financial health rating of 8 out of 10 indicates a solid and stable base. The report points out several areas of strength:

• Solvency: The company shows a very low Debt-to-Equity ratio of 0.04, indicating little dependence on debt financing and doing better than almost 75% of its industry. Also, its Altman-Z score of 6.86 suggests a very low near-term risk of financial distress.
• Liquidity: With both a Current Ratio and a Quick Ratio of 2.41, Cognizant shows sufficient ability to meet its short-term obligations, scoring higher than most companies in its sector.

A financially healthy company is less susceptible to external shocks and has the freedom to invest in growth opportunities or return capital to shareholders, making it a more secure candidate for a long-term value portfolio.

Profitability

While a stock may be inexpensive, it must also be a quality business generating consistent profits. Cognizant's profitability rating of 7 reflects its ability to efficiently convert revenue into earnings. Key points include:

• Strong Margins: The company has an Operating Margin of 15.52% and a Profit Margin of 11.89%, placing it with the top performers in its industry.
• Efficient Capital Use: Its Return on Invested Capital (ROIC) of 14.18% is good, doing better than 87% of industry peers, which points to effective use of capital to generate profits.

For the value strategy, sustained profitability confirms the business model and suggests that the intrinsic value is supported by real earning power, not just speculative assets.

Growth Prospects

Although value investing often gives priority to price over fast growth, some growth is needed to make sure the intrinsic value rises over time. Cognizant's growth rating of 5 indicates a steady, if not rapid, path. The report mentions:

• Earnings and Revenue Growth: The company has delivered consistent, modest growth in both Earnings Per Share (EPS) and Revenue over recent years.
• Accelerating Expectations: Importantly, future EPS growth is predicted to increase to about 9.47% annually, with revenue growth expected to be around 5.30%.

This measured growth profile is often appealing to value investors, as it suggests the company is not overpaying for expansion and can build value reliably over the long term.

Cognizant Technology Solutions presents a strong case for investors using a disciplined value method. Its attractive valuation multiples suggest a potential margin of safety, while its high scores in financial health and profitability give confidence in the company's underlying quality. The steady growth outlook further supports the idea that the stock may be undervalued relative to its future potential. As with any investment, this analysis should be part of a wider due diligence process.

View the full fundamental analysis report for CTSH here.

This analysis of Cognizant was found using a "Decent Value" screening strategy. If you are interested in finding other stocks that meet similar criteria, you can find more results using this predefined screen.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an endorsement of any investment strategy. All investments involve risk, including the possible loss of principal. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.