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KeyBanc Downgrades Cognizant: 3 Reasons Why

Shanthi Rexaline

Cognizant Technology Solutions Corp (NASDAQ: CTSH) reported Thursday after the close with below-consensus first-quarter revenue and reduced its full-year guidance, citing weakness in the financial and health care verticals.

The Analyst

KeyBanc Capital Markets analyst Arvind Ramnani downgraded Cognizant from Overweight to Sector Weight.

The Thesis

Cognizant's disappointing first-quarter results boiled down to weakness in financial services and health care clients and margin pressure, Ramnani said in a Thursday note. (See his track record here.) 

The magnitude of downward revision to full-year revenue guidance is material, with the outlook assuming 2.7-percent organic growth in constant currency compared to the 6.5-percent growth estimated earlier, the analyst said. 

Downward revisions to Cognizant's long-term targets are likely, Ramnani said.

View more earnings on CTSH

The analyst attributed the downgrade to three factors: 

  • Weakness in financial services, which accounts for 35 percent of total revenue, and health care, which accounts for 28 percent of revenues, persisting in the near-to-medium term.
  • Lack of clarity and a time frame for revised long-term targets.
  • Potential incremental senior-level changes expected over the next two to three quarters, weighing on the stock.

On a positive note, KeyBanc said the lowered targets could be conservative and set the company up for a "beat-and-raise" cadence. The research firm also sees the possibility of recovery in some large accounts.

The Price Action

In pre-market trading Friday, Cognizant shares were sliding 7.73 percent to $61.46.

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Latest Ratings for CTSH

Date Firm Action From To
May 2019 Downgrades Outperform Neutral
May 2019 Downgrades Neutral Underweight
May 2019 Downgrades Buy Neutral

View More Analyst Ratings for CTSH
View the Latest Analyst Ratings

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