Cognizant Technology Is Still Looking to Get Bigger

Image source: Cognizant Technology.

As long as information technology continues to evolve, there'll be a need for experts who can help users exploit technological innovations more broadly and effectively. Cognizant Technology Solutions' entire business model centers on helping its clients make the most of the technology that's available to them, and over the years, Cognizant's business has grown substantially as the need for up-to-date guidance and support has driven the IT consultant's success.

As investors prepare for the company's third-quarter financial report Wednesday, Cognizant is once again hoping it can sustain its healthy pace of expansion well into the future. Let's take an early look at what investors are expecting from Cognizant Technology and whether it is likely to deliver on all of its potential.

Stats on Cognizant Technology

Data source: Yahoo! Finance.

Can Cognizant keep its earnings streak alive? In recent months, investors have gotten even more excited about Cognizant's earnings growth potential, boosting their third-quarter estimates by a penny per share and sending full-year 2016 projections up by a nickel per share. The stock has continued its upward track, rising more than 10% since late July.

Cognizant's second-quarter results in early August demonstrated that the IT specialist still has the ability to give long-term investors some positive surprises. Revenue surged 23%, and although net income grew at a more sedate pace of 13%, Cognizant's earnings per share were more than a nickel better than most investors had expected. Particular strength in the fast-growing healthcare segment as well as the large financial services business helped drive Cognizant forward, and favorable conditions in North America offset somewhat more sluggish performance in Europe. That led to guidance increases from Cognizant, helping to set the stock up for its gains over the quarter.

One interesting aspect of the success of the IT services industry is that it has come even at a time when spending on technology has fallen. According to one set of estimates, global IT spending will fall nearly 5% this year before returning to a growth trajectory in 2016 and beyond. Yet neither Cognizant nor rival Accenture has seen headwinds from that anticipated pullback in spending prevent them from sustaining their own growth. Accenture's total sales rose just 1.4% during its most recent quarter, but the strong dollar masked what would have been double-digit percentage growth on a constant currency basis. Cognizant has tended to outperform Accenture with faster growth, and few see that dynamic changing anytime soon.

Cognizant has also worked hard to try to develop alliances that can help boost its overall business prospects. For instance, in September, Cognizant announced a partnership with Verizon that will allow joint enterprise clients to receive leading-edge technology solutions more quickly. By using Verizon's innovation centers in San Francisco and just outside Boston, customers will be able to get demonstrations of technology they might be able to use to improve their own productivity. By supporting initiatives like the Internet of Things while helping clients in the widest possible array of different industries, Cognizant hopes to make itself indispensable to a broader range of customers in order to expand its overall business.

In the Cognizant Technology Solutions earnings report, investors need to look closely at how well the company has done at integrating its most recent acquisitions into its broader corporate structure. Cognizant has done a good job of growing through acquisitions, and especially in an industry that tends to be fragmented and subject to specialization, a consistent flow of new business purchases can keep Cognizant invigorated and prepared to handle fresh challenges. Even as competition from Accenture and other IT consulting companies becomes fiercer, Cognizant has shown its ability to outdo its rivals in the past and has every chance of doing so again this time around.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cognizant Technology Solutions. The Motley Fool recommends Accenture and Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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