Monday, November 28, 2016

Elliott Management's Letter to Cognizant

Today Elliott Management disclosed a $1.4 billion 4% stake in Cognizant Technology Solutions(CTSH).  The activist firm identified a few key areas they feel could create significant and immediate value to shareholders.  According to their research and plan the company could easily boost it's stock price to $80-$90 with ease. You can read the entire letter here. Here is an article highlight.

– Cognizant is viewed as being shareholderunfriendly. In contrast, Accenture is viewed as being a responsible steward of shareholder capital and is therefore awarded a multiple of more than 20x NTM P/E, a meaningful premium to the entire peer group, despite having the lowest revenue growth rate. Its robust capital return and margin expansion programs support a far higher multiple than its slower growth alone warrants, because it offers shareholders a balanced set of drivers to deliver investment returns. Cognizant, on the other hand, gets penalized with a significant discount. Because Cognizant has a limited capital return program and explicitly commits not to expand margins, shareholders must rely on the Company delivering above-average revenue growth for investment returns. When selecting companies in which to invest capital, shareholders will naturally gravitate toward management teams with proven capital allocation track records.

For the most part they identified the lack of a plan to consistently return cash to shareholders(ie buybacks & dividends), adherence to an old margin policy, and a misguided reliance on revenue growth. Furthermore they cited the company had excess cash and very little debt, which they made it seem is bad. The last problem I'd be ecstatic to have.  I'd put that comment in the list of "things you don't hear people complain about".

I'd have to agree that the company needs to make some changes. It's just part of the business cycle. Revenue growth has been tailing off compared to it's historical growth rate.  That alone is a big clue it's time to change your focus. I've been a champion of the company, and even I was starting to wonder if they would initiate a dividend soon.  The company could easily handle it. 

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