Plenty of Upside for Cognizant Shareholders

Andrew Lange: Recently, our best idea, Cognizant, received a letter from hedge fund Elliott Management outlining the hedge fund's conviction in the value opportunity at the IT services firm.

Elliott, which disclosed that it owns over 4% of the company, believes Cognizant can achieve a valuation of $80-$90 or more per share by the end of 2017, and the hedge fund outlined its value-enhancement plan with which to achieve this goal.

The value-enhancement plan called for a mixture of operational improvements, efficient allocation of capital, and effective oversight and incentive alignment. We think Elliott's letter has merit and agree that the stock is trading at a meaningful discount to our unchanged $69 fair value estimate. However, we do question the timing and seriousness of the board's response.

We concur that Cognizant is a market leader in the IT services industry and has developed leading franchises in next-generation digital and cloud workloads, although its current share price doesn't reflect this reality. Recent macroeconomic and foreign corrupt practice headwinds aside, we do think that margin expansion and a more shareholder-friendly approach to capital allocation would be well-received by the investment community and has the potential to lift total shareholder returns.