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Is Cognizant Technology (CTSH) a Good Value Investor Pick?

Zacks Equity Research

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Cognizant Technology Solutions Corporation CTSH stock into this equation and find out if it is a good choice for value oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Cognizant Technology Solutions has a trailing twelve months PE ratio of 15.73, as you can see in the chart below:


 
This level actually compares favorably with the market at large, as the PE for the S&P 500 stands at about 18.43. If we focus on the long-term PE trend, Cognizant Technology Solutions’ current PE level puts it below its midpoint of 20.65 over the past five years, with the number having risen rapidly over the past few months. However, the current level stands below the highs for the stock, suggesting that it can be a solid entry point.


 
Moreover, the stock’s PE also compares favorably with the Zacks Computer and Technology Market sector’s trailing twelve months PE ratio, which stands at 22.48. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.


 
We should also point out that Cognizant Technology Solutions has a forward PE ratio (price relative to this year’s earnings) of 15.63, so it is fair to say that a slightly more value-oriented path may be ahead for Cognizant Technology Solutions’ stock in the near term too.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Cognizant Technology Solutions has a P/S ratio of about 2.12 This is much lower than the S&P 500 average, which comes in at 3.25 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.


 
Broad Value Outlook

In aggregate, Cognizant Technology Solutions currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Cognizant Technology Solutions a solid choice for value investors.

For example, the PEG ratio for Cognizant Technology Solutions is just 1.42, a level that is lower than the industry average of 2.51. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Additionally, the P/CF ratio for Cognizant Technology Solutions (another great indicator of value) comes in at 12.54, which is better than the industry average of 23.79. Clearly, CTSH is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Cognizant Technology Solutions might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of B and Momentum Score of A. This gives CTSH a Zacks VGM score — or its overarching fundamental grade — of A. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been encouraging. The current quarter has seen six upward revisions in the past sixty days compared to one downward revision, while the full year estimate has seen 10 upward revisions compared to no downward revisios in the same time period.

As a result, the current quarter consensus estimate increased 2.94% in the past two months, whereas the full year estimate rose 1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Cognizant Technology Solutions Corporation Price and Consensus

Cognizant Technology Solutions Corporation Price and Consensus

Cognizant Technology Solutions Corporation price-consensus-chart | Cognizant Technology Solutions Corporation Quote

Even though the company has better estimate trends, the stock has a Zacks Rank #3 (Hold), which is why we are looking for in-line performance from the company in the near term.

Bottom Line

Cognizant Technology Solutions is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (bottom 29% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the broader industry has underperformed the market at large, as you can see below:


 
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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