Earnings Preview: Cognizant (CTSH) (INFY) (WIT)

Cognizant Technology Solutions Corporation (CTSH) is expected to report revenues of approximately $1.875 billion in the third quarter of 2012. EPS is estimated to be 86 cents in third quarter 2012. Excluding stock-based compensation expense, EPS is forecasted at 92 cents in the third quarter of 2012.

For the full year 2012, Cognizant expects revenues to increase at least 20% annually to $7.34 billion. The company witnessed a modest rebound in banking services and remains optimistic for the remainder of the year.

The growth for the remainder of 2012 will come from the ramp up in client acquisitions over the last few months, including ING U.S., Philips and others. Europe remains an attractive market in the long term and the company continues to focus heavily on building its front-end capability, particularly in France and Germany where it continues to see an increasing number of opportunities.

Although the economic uncertainty continues to limit spending, management continues to see an upside in pipeline as clients look for ways to run their business more efficiently. In addition, Cognizant continues to see a shift in business mix from discretionary projects to larger end-to-end outsourcing deals.

EPS is likely to be $3.38 for 2012, up from the previous estimate of $3.36. Excluding stock-based compensation expense, EPS is forecasted at $3.64, up from the earlier forecast of $3.62.

Meanwhile, earnings estimates for the third quarter and full year 2012 have been more or less static in the last few days with no movement in either direction. For 2013, earnings estimates have moved up marginally.

Earlier, the company posted an EPS of 82 cents in the second quarter of 2012, beating the Zacks Consensus Estimate by 2 cents. Cognizant reported revenues of $1.795 billion in the second quarter of 2012, up 20.9% year over year and 4.9% sequentially.

Cognizant has always set a robust tone in terms of growth prospects compared to its competitors, Infosys Technologies (INFY) and Wipro Ltd. (WIT).

However, the global economic environment remains uncertain as volatility in Europe persists. Moreover, both developed and developing economies have lowered their GDP forecasts, which along with a looming fiscal cliff in the United States prompt a cautious investment environment.

We continue to maintain a Neutral recommendation on Cognizant in the long run. Nevertheless, the company has a Zacks #2 Rank, which translates into a short-term rating of Buy.