Cognizant Technology Solutions (Nasdaq: CTSH) announced solid results for the second quarter. Earnings were up 22.4% compared with the same quarter last year. Revenue increased 20.9%. Shares jumped 11% following the announcement.
Will shares go even higher? Here are three reasons why they likely will.
1. Cognizant has shown that it can weather tough economic times relatively well.
Some investors might have seen weak forecasts from Indian outsourcing firm Infosys (Nasdaq: INFY) as a potential negative harbinger for Cognizant. Infosys recently announced its outlook for annual revenue growth of 5% and earnings growth of only 1%.
Global technology consulting and outsourcing firm Accenture (NYSE: ACN) is more positive, with projected annual revenue growth of 10% to 12%. Yet Cognizant predicts annual revenue growth of at least 20%. How is the company performing so well in the midst of a difficult global economy?
For one thing, Cognizant receives nearly 80% of its revenue from North America, which has fared better economically than Europe so far in 2012. By comparison, North America accounts for 64% of Infosys' total revenue. Accenture receives 45% of its revenues from the Americas region.
Cognizant also benefits from tight relationships with several larger customers. Around 25% of revenue is generated from the company's top 10 customers. These relationships help provide a steady financial base for the company as it seeks other growth opportunities.
2. Cognizant's current weaknesses could become strengths over the long run.
While Cognizant's strong North American presence certainly helps when other parts of the world are struggling, it also represents a weakness. However, the company is making strides to increase its international client base.
CEO Francisco D'Souza points to Brazil as a good example. During the company's earnings call, D'Souza noted that Cognizant won several new clients in Brazil after establishing a strong local leadership team and building out a local delivery center.
Despite current issues in Europe, Cognizant says that the region remains an attractive market over the long run. The company is focusing on expanding its capabilities, especially in France and Germany. Cognizant management reports that it has a good pipeline of prospective clients in Europe, which could set the company up to perform well in the region in 2013.
Another current weak area for the company is in the health-care market. Health care makes up around 27% of total revenue. The health-care segment grew more slowly earlier this year as pharmaceutical companies spent less because of drugs going off patent. However, Cognizant regained sequential growth in the segment in the second quarter.
Cognizant expects only modest growth in the health-care segment for the near term. However, potential longer term drivers include resurgence in pharmaceutical industry spending as new drugs come to market and increased technology spending by health plans as they implement more provisions of the Accountable Care Act.
3. Cognizant has a good window for seeing how the rest of 2012 will unfold.
Probably the most important reason for expecting that Cognizant shares will continue to increase is that the company has a pretty clear picture for how the rest of the year will unfold. With that knowledge, management reaffirmed revenue guidance for the year and raised its adjusted profit forecast.
Two recent deals bolster Cognizant's optimism. In June, the company announced a $330 million expansion in its relationship with the U.S. retirement, investment management and insurance operations of Dutch-based ING (NYSE: ING). As part of the agreement, Cognizant is hiring more than 1,000 ING employees and will build a business processes services center of excellence for the financial and insurance industries.
Cognizant was also recently selected by Royal Philips Electronics (NYSE: PHG) as a strategic technology partner. During the multi-year engagement, Cognizant will help Philips transition its IT organization to a platform and output-based managed services model.
High-profile projects such as these can reinforce other organizations' perception of Cognizant as a leader in the technology-enabled business transformation arena. That could help the company win even more business in the future.
Final analysis
Despite the overall dismal picture globally, Cognizant appears to be in good shape to continue its remarkable growth. One area of concern, though, is currency fluctuations. Cognizant absorbed currency exchange losses totaling more than $20 million. However, the company expects its overall business growth to mitigate these losses.
Cognizant's forward P/E of 16.42 is closer to the low end of its five-year range than to the high end. Even with the surge after the earnings announcement, shares still trade 20% off the highs from earlier this year. It seems likely that Cognizant will regain those highs in the coming months.
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