Analyst Note| Julie Bhusal Sharma |
While Cognizant’s second-quarter top-line well surpassed FactSet consensus, the labor shortage amid this summer’s hot job market moderated the robust demand, leading to adjusted EPS coming roughly in line with FactSet consensus and our estimates. Despite continued elevated attrition levels expected in the remainder of the year, Cognizant raised its outlook for 2021, which bodes confidence in the pace of its hiring and reskilling of employees to meet oversubscribed demand for IT services. Overall, we think Cognizant is making a laudable effort amid what it claims has been the hottest job market the company has seen in the last 10 years. Furthermore, we have no complaints on demand given the company’s healthy book-to-bill of 1.2 over the last twelve months. Therefore, adjusting for a rosier outlook regarding demand, while still being realistic about margin stress from the labor shortage, we are increasing our fair value estimate for narrow-moat Cognizant to $76 per share from $70 per share. Shares are up 6% to $74 per share after hours, leaving the stock fairly valued in our view.