Is the Market Giving Cognizant a Pass?

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On June 22, Accenture Plc (NYSE: ACN) reported an impressive quarter. The IT consulting firm delivered 7% revenue growth, increased its market share, and grew net income 34% from the same period a year ago. Despite its strong quarter, the stock fell as much as 6% after the announcement and ended the day down 4%. One possible reason was that Accenture lowered its annual guidance of 6% to 8% revenue growth to a 6% to 7% increase. The culprit for the reduced outlook was uncertainty around U.S. healthcare policy.

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CFO David Rowland had this to say about the remainder of the year.

Our North America business was negatively impacted by a slower-than-expected decision-making and initiation of new projects due to continued uncertainty on healthcare legislation and state and federal budgets. We now expect these factors to continue to impact our business at least through the fourth quarter.

Background on healthcare legislation

After taking an unpopular draft of healthcare legislation off the table earlier this year, the House of Representatives on May 5 voted to pass an alternative plan to replace the Affordable Care Act. However, after opposition from their own party, Senate Republicans recently decided to delay a vote on the replacement bill, with Senate Majority Leader Mitch McConnell vowing to go back to the drawing board to come up with a plan that will garner enough support to pass the Senate.

The uncertainty affecting Accenture's business comes from the unknowns of what future legislation looks like when it will pass, and the aftermath of the change. To add to that uncertainty, President Trump tweeted that he may just push to repeal the Affordable Care Act before having a plan to replace it.

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Accenture and Cognizant's healthcare exposure

Accenture's revenue guidance changed by only 1% on the high end, but the stock still took a decent hit. Given that 17.5% of the company's revenue comes from the health and public service industries, the drop isn't surprising. What is surprising is that competitor Cognizant Technology Solutions (NASDAQ: CTSH) didn't get similar treatment from Wall Street. With 28.3% of Cognizant's revenue coming from healthcare, the smaller IT consultant is far more exposed to the industry than Accenture is. Yet, on the day Accenture lowered its guidance because of uncertainty over healthcare legislation, Cognizant's stock price remained relatively flat.

Part of the reason Cognizant didn't take the hit Accenture did is that healthcare reform may be negatively affecting Accenture more than it's affecting Cognizant. In its most recent quarter, Accenture reported revenue growth of just 1% from the healthcare industry, a marked decline from the same quarter last year, when it delivered 11% growth. Meanwhile, Cognizant's healthcare segment accelerated, with 10% revenue growth in its most recent quarter, compared with only 4% last year.

Although Cognizant President Rajeev Mehta did acknowledge the uncertainty around healthcare legislation, his tone wasn't as pessimistic as Accenture. 

I think obviously there's still a lot of uncertainty out there in terms of what happens with proposed legislation around the Affordable Care Act. But we are seeing some stability, especially given that some of the large [merger and acquisition] deals that were out there, we're starting to see some. Given that those are not moving forward, we're starting to see some pent-up demand, which is a good start for us as well.

There are a lot of unknowns about where healthcare legislation is going. Accenture is beginning to feel the effects, but Cognizant appears to be getting the benefit of the doubt for now. Whether that optimism changes remains to be seen, but investors will have a clearer picture of the impact of healthcare legislation's effect on Cognizant's business when it reports earnings again in early August. But the level of clarity around healthcare in the United States is another story.

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Palbir Nijjar has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cognizant Technology Solutions. The Motley Fool recommends Accenture. The Motley Fool has a disclosure policy.