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Stock Strategist

Investors Should Be Cognizant of This Undervalued IT Services Stock

With its recently announced acquisition plans, we think Cognizant offers the most attractive upside within the IT services industry.


IT services firm  Cognizant (CTSH) announced on Sept. 15 that it has entered into a definitive agreement to acquire TriZetto, a privately held health-care IT provider, for $2.7 billion. Strategically, the combined health-care unit is expected to add value for Cognizant given integrated end-to-end service capabilities. Cognizant already has a good position in the health-care industry--health care constitutes approximately 26% of the company’s revenue--and we think the acquisition will further cement the firm in the market. Importantly, we believe the combined business will enhance Cognizant’s ability to compete for larger integrated deals. The acquisition is expected to be neutral to positive to growth and margins in fiscal 2015 and gradually contribute roughly $1.5 billion in revenue over the next five years. Still, we retain our $55 fair value estimate and narrow economic moat rating.

Cognizant and TriZetto have a long-standing relationship. The companies have significant overlap of clients, and Cognizant has the substantial experience of providing systems integration services for TriZetto. As a result, we think the acquisition will be fairly seamless. Cognizant will finance the deal with cash and debt, and the company has secured a $1 billion bridge loan. Long-term financing is expected to be in place around the close of the deal in the fourth quarter of the financial year. Cognizant does not expect any additional large-scale M&A in the foreseeable future, and the firm’s existing share repurchase plan will be unaffected. With the company trading at a 20% discount to our $55 fair value estimate, we think the firm offers the most attractive upside within the IT services industry. For investors looking for a growth stock within the IT services market, we believe Cognizant is an appropriate holding.

Andrew Lange does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.