IT consulting and outsourcing firm Cognizant Technology Solutions (click ticker for report: ) reported strong growth in the second quarter Monday morning. Excluding stock-based compensation, the firm earned $0.88 per share during the second quarter, year-over-year growth of 22% and 8 cents higher than consensus estimates. Revenue grew 21% to $1.8 billion, roughly in-line with Street expectations. The company guided to solid third quarter and full-year earnings, expecting $0.92 per share during the third quarter and full-year earnings of at least $3.38, both of which are higher than expected. As a result, shares are converging to our $68 per share fair value estimate.
Revenue grew solidly across all segments, with Healthcare and Financial Services surging 20% and 25%, respectively. With technology such an integral part of both businesses, we expect both areas to continue to grow. Cognizant announced a $330 million deal with ING U.S. (ING) that required hiring over 1,000 employees and “will create a world-class, U.S.-based Center of Excellence to provide similar services to other Cognizant financial clients.” This deal also underscores the growth of the firm’s North American business, which climbed 24% to $1.4 billion during the second quarter. Though management spoke to a decent 2013 pipeline in Europe, revenue in the region grew 2%, to $282 million. Still, the long-term shift toward IT outsourcing should rise in the region as firms look for ways to cut costs and increase profitability.
As we mentioned earlier, growth going forward looks promising. Management emphasized a strong deal pipeline, though deal timing isn’t entirely predictable. Cognizant also noted that its guidance did not reflect fourth quarter “budget flush,” which means results could be even higher than expected. Management noted the recent economic deceleration is not affecting business the way it did in 2007 and 2008, going so far as to say the weak growth could help its own business grow as customers focus on efficiency.
Overall, Cognizant posted a strong second quarter and remains poised to grow. Still, we think the current valuation is appropriate, so we don’t see tremendous upside from current levels. The firm scores a 3 on the Valuentum Buying Index (our stock-selection methodology), so we are not enticed to establish a position at this time.