Hedge fund manager Elliott Management has offered the narrow-moat IT services firm a blueprint for unlocking value, but we question the timing and seriousness of the board's response.
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On Nov. 28, Best Idea Cognizant
received a 16-page letter from hedge fund Elliott Management outlining the hedge fund’s conviction in the value opportunity at the IT services firm. Elliott, which disclosed that it owns over 4% of the company, believes Cognizant can achieve a valuation of $80-$90 or more per share by the end of 2017 and outlined its value-enhancement plan with which to achieve this goal. The plan calls for a mixture of operational improvements, efficient allocation of capital, and effective oversight and incentive alignment. Elliott also requested a near-term meeting with the board so that Cognizant can announce and implement this strategy by Cognizant’s next earnings call in February. We think Elliott’s letter has merit and agree that the stock is trading at a meaningful discount to our unchanged $69 fair value estimate, but we question the timing and seriousness of the board’s response. Overall, Elliott’s biggest takeaway is that as Cognizant has moved from being a nascent industry challenger to a large-scale industry leader, its profitability and capital-allocation policies should follow suit.
Andrew Lange is an equity analyst for Morningstar.
We concur that Cognizant is a market leader in the IT services industry and has developed leading franchises in next-generation digital and cloud workloads, although its current share price doesn’t reflect this reality. Recent macroeconomic and foreign corrupt practice headwinds aside, Elliott believes that margin expansion and a more shareholder-friendly approach to capital allocation would be well received by the investment community and lift total shareholder returns.
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