Will Cognizant Technology Solutions (CTSH) Beat Q2 Earnings?

We expect Cognizant Technology Solutions Corp. (CTSH) to beat expectations when it reports second-quarter 2014 results on Aug 6.

Why a Likely Positive Surprise?

Our proven model shows that Cognizant is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +5.09%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks Rank #2 (Buy): Note that stocks with a Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

The combination of Cognizant’s Zacks Rank #2 and +5.09% ESP makes us very confident in looking for a positive earnings beat this quarter.

What is Driving the Better-than-Expected Earnings?

We believe that Cognizant, which competes with the likes of Accenture (ACN), Infosys and Wipro Ltd., remains well diversified in key verticals and emerging markets of social, mobile, analytics and cloud, which will continue to boost its top line.

Increasing off-shoring will drive Cognizant’s results in the near term. Cost efficiency amid tight IT spending budget well positions the company to grow in the near term. However, increasing headcount may hurt profitability.

Other Stocks to Consider

Cognizant is not the only firm looking up this earnings season. We also see likely earnings beats coming from these two industry peers:

Super Micro Computer (SMCI), with an Earnings ESP of +2.78% and a Zacks Rank #1 (Strong Buy).

Semiconductor Manufacturing International Corp. (SMI), with an Earnings ESP of +33.33% and a Zacks Rank #2.