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What's in the Cards for Cognizant (CTSH) in Q3 Earnings?

Cognizant Technology Solutions Corp CTSH is set to report third-quarter 2017 results on Nov 1. In the trailing four quarters, the company has beaten the Zacks Consensus Estimate on three occasions, delivering an average positive surprise of 1.72%.

Last quarter, Cognizant delivered a positive earnings surprise of 3.33%. Revenues of $3.67 billion beat the Zacks Consensus Estimate of $3.66 billion and increased 8.9% year over year driven by growth across all the four domains.

For the third quarter of 2017, Cognizant expects revenues in the range of $3.73–$3.78 billion. Non-GAAP earnings are expected to be 94 cents per share.

Shares of Cognizant have gained 34.5% year to date, significantly outperforming the industry’s 26.9% rally.

Let’s see how things are shaping up for this announcement.

Factors at Play

Cognizant’s domain expertise is a key catalyst. The company is consistently developing its capabilities to benefit from the ongoing digital transition, especially when it comes to integration of the new digital framework with legacy technology platforms.

Cognizant is significantly benefiting from accretive acquisitions. The buyouts have not only led to an increase in new customers but also enhanced its overall digital delivery capabilities.

The company’s large exposure to fast growing financial service and health care sector, through partnerships with top firms like Microsoft MSFT, has helped it to outpace Tier-1 peers.

Notably, Cognizant completed the acquisition of TMG Health in August. The integration of TMG Health and the company’s TriZetto platform reinforces its leading service provider position for the government-managed healthcare programs in the United States. It will enable the company to expand its healthcare offerings and thereby cater to growing demand from its payer clients.

Growth in the company’s Products & Resources segment along with its Communications, Media and Technology segments is also anticipated to boost its top line. The company’s share-repurchase initiatives are expected to drive the bottom line.

However, Cognizant is exposed to significant geographic concentration risks with North America contributing to the majority of its revenues. Therefore, opening of its new London Digital Business Collaboratory in July is a positive in our view.

Further, competition from peers like Accenture, Infosys and Wipro is a major concern. Besides, increasing investment owing to the TMG Health deal and ongoing development strategies may weigh on margins.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or #5) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Cognizant has a Zacks Rank #2 but its Earnings ESP is -0.16%. Therefore, our proven model does not conclusively show that the company is likely to deliver a positive surprise this quarter.

Stocks That Warrant a Look

Here are a couple of companies that you may want to consider as our model shows that these have the right combination of elements to deliver an earnings beat in their upcoming release:

Kemet Corporation KEM with an Earnings ESP of +7.46% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA Corporation NVDA with an Earnings ESP of +0.53% and a Zacks Rank #1.

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