The narrow-moat firm remains a leading provider in digital operations, and it has strong prospects in digital and cloud-related work.
By Andrew Lange | 11-07-16 | 10:36 AM | Email Article

 Cognizant's third-quarter results were generally in line with our expectations, with the company continuing to cite similar business trends to those of previous quarters. From an industry standpoint, financial services remained under pressure, given macroeconomic uncertainty and a low-interest-rate environment, while ongoing industry consolidation within healthcare continued to weigh on that segment. Also, Cognizant addressed its ongoing foreign corrupt practices investigation, with the firm providing a little more clarity on the matter. We think investors have taken some solace in hearing management describe the investigation in more detail, although the final determination remains unknown. We believe the firm remains a leading provider in digital operations, and it reported noteworthy demand across all industries. We still like the firm’s prospects in digital and cloud-related work and reiterate our $69 fair value estimate and narrow economic moat rating. We view the firm as one of the best investment ideas in the technology space and think it is trading at a meaningful discount to its fair value.

Andrew Lange is an equity analyst for Morningstar.

In terms of Cognizant’s investigation, it has identified approximately $5 million in potential improper payments. Cognizant has concluded that the amount is not material and won’t require a restatement of its historical financial statements. The company also finally linked former President Gordon Coburn's departure with the investigation, as we had suspected, and the firm announced a major overhaul to procurement and accounts payable as it applies to real estate transactions in India. Nevertheless, with the investigation ongoing, the duration, scope, and result remain uncertain. Until the final determination is known, it is possible that the investigation could provide a bit of an overhang, but we think that shares have been unfairly punished.

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