Cognizant Cashing in Profits

Cognizant Technology Solutions (CTSH) reported third-quarter revenue declined slightly to $4.2 billion with net income falling 30% to $348 million and EPS declining 29% to $0.64.

Revenue for Financial Services declined 1.5% year-over-year in both banking and insurance. Healthcare revenue grew 4.8%, driven by life sciences. Growth in biopharmaceutical clients and revenue from the acquisition of Zenith Technologies offset weakness in medical device clients. Products and Resources revenue decreased 4%, hurt by retail, consumer goods, travel, and hospitality clients that were adversely impacted by the pandemic, partially offset by double-digit constant currency growth in manufacturing, logistics, energy, and utilities. Communications, Media, and Technology revenues increased slightly with growth in communications and media more than offset by the impact from the 2019 strategic decision to exit certain content-related services. Excluding that impact, Communications, Media, and Technology grew revenue by about 9% in constant currency.

During the quarter, Cognizant generated $821 million in free cash flow, up to $200 million from last year, with the company repurchasing $700 million of its common stock and paying dividends of $120 million. The company ended the quarter with $5 billion in cash and investments, $2.4 billion in long-term debt, and $11.1 billion in shareholders’ equity on its strong balance sheet. Bookings increased 25% year-over-year leading management to raise their sales and earnings outlook for 2020 with expected revenues of $16.7 billion and adjusted EPS in the $3.63 to $3.67 range. Cognizant’s stock has provided a 135% total return over the last eight years and now appears fully valued, prompting us to trim our position.

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Oracle Substantial Buybacks

Oracle (ORCL) reported fiscal 2021 first-quarter sales increased 2% to $9.4 billion with EPS increasing 14% to $0.72. Cloud services and license support revenues, which accounted for 74% of total revenues, increased 2% to $6.9 billion. Cloud applications businesses continued growing rapidly with Fusion ERP up 33% and NetSuite ERP up 23%. Oracle now boasts 7,300 Fusion ERP customers and 23,000 NetSuite ERP customers in the Oracle Cloud.

Oracle’s cloud infrastructure businesses also continued growing rapidly with revenue from Zoom more than doubling during the quarter. Cloud license and on-premise license revenues, which represented 9% of total sales, increased 9% to $886 million. Hardware sales, also 9% of total sales, dipped slightly from last year to $814 million and Services sales, 8% of the total, fell 8% to $720 million.

Operating margins increased 300 basis points to 34% on lower expenses. Oracle generated $5.5 billion in free cash flow during the quarter, down 2% from last year on a 13% jump in capital expenditures as the company continues to build out its global cloud infrastructure. The company returned $5.7 billion to shareholders during the quarter through dividends of $730 million and share repurchases of $5 billion. During the past 12 months, Oracle repurchased $19.2 billion of its shares. During the past decade, the company has reduced its shares outstanding by 40%. The company ended the quarter with more than $42 billion in cash and marketable securities, $68 billion in long-term debt, and $10 billion in shareholders’ equity. In the fiscal second quarter, revenues are expected to be flat to up 2% with EPS up 10% to 14%. We are trimming our position in Oracle which appears fairly valued after deliver-ing an 88% total return over the past seven years.

Tax Loss Harvesting Candidates

Significant capital gains have been realized in 2020 as many stocks approached full valuations (see p. 5). To help mitigate the tax consequences, we harvested losses for taxable accounts from the following companies.

Biogen’s (BIIB) stock price pulled back on disappointment over an independent review of its Alzheimer’s drug. General Dynamics (GD) and Raytheon Technologies (RTX) both have been adversely impacted by weakness in the aerospace sector due to the pandemic.

Walgreens Boots Alliance (WBA) pulled back on potential competitive pressures from Amazon (AMZN).

With the profits from Cognizant and Oracle, we plan to buy Check Point Software (see: Market Innovator: Check Point Software Technologies) and Regeneron (see Stock Profile: Regeneron Pharmaceuticals, Inc.).