Will Cognizant Technology's Earnings Start 2016 Strong?

Image source: Cognizant Technology.

The technology sector has been expanding for decades, and Cognizant Technology Solutions (CTSH 1.33%) has profited from helping its clients take maximum advantage of technology to improve their operations. But IT consulting has become extremely competitive, and companies like IBM (IBM 1.67%) that used to specialize in hardware have seen the profit opportunities of offering consulting services as well. Coming into Monday's fourth-quarter financial report, Cognizant shareholders expect the IT consultant to keep growing, but some fear potential fallout from a slowing global economy. Let's take an early look at how Cognizant Technology is likely to perform and what's ahead for 2016.

Stats on Cognizant Technology

Data source: Yahoo! Finance.

Will Cognizant earnings keep climbing?
In recent months, investors haven't had a big change in their views on Cognizant's earnings. They've kept their near-term estimates stable, and they've only reduced full-year 2016 projections by a couple of pennies. The stock has given up considerable ground, though, falling 12% since late October.

Cognizant's third-quarter results in November showed just how much growth the company has been able to generate even in troubled times for the global economy. Sales climbed by more than 23%, and a 12% rise in net income matched up well with what investors had expected to see from the company. Cognizant's healthcare segment had the best performance in posting 43% revenue growth, but the larger financial services sector also did well, pushing sales up 19%. Even though the strong dollar had a substantial impact on the revenue and income from Cognizant's overseas business, the opportunity to help clients worldwide adapt to the digital revolution produced considerable growth even with currency headwinds. That's an edge that has helped to keep Cognizant ahead of IBM, especially since IBM has had to deal with a much broader business weighing down its competitive efforts.

However, Cognizant has had to deal with a major natural disaster that had an impact on its operations. In December, the Chennai area in India suffered unprecedented flooding, and that forced Cognizant and industry peers like Wipro (WIT +2.06%) to figure out how to maintain continuity of critical operations for clients. Cognizant in particular has 11 delivery and operations centers in the region. But in January, Cognizant said that its business continuity plan had successfully allowed it to avoid any major financial impact from the flooding. The company therefore reaffirmed its revenue and earnings guidance, reassuring investors who had feared that the floods could cause a one-time shortfall.

Cognizant has also had the opportunity to pursue some interesting strategic moves. The company was reportedly among several players looking at potentially acquiring Perot Systems, the IT management business of now-private Dell. Some analysts believe that Cognizant could boost its earnings by bringing Perot into the fold, and an increase in size would make Cognizant even more competitive against IBM and other big-tech rivals. But so far, the company hasn't taken definitive action on what many expect would be a roughly $5 billion deal.

In the Cognizant Technology Solutions earnings report, investors should watch to see what Cognizant's longer-term strategy is going forward. Opportunities like the Perot Systems acquisition can only succeed if they fit into the framework of a vision for growth in the long run, and it would be a mistake for the company to act too hastily just to win a bidding war. If Cognizant can keep growing while holding larger competitors like IBM at bay, then its future should look bright in 2016 and beyond.