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Cognizant Could Come Through Again

By Gene Marcial Although shares of Cognizant Technology Solutions (CTSH) have crumbled from 75 apiece last summer to 39, the company still boasts a total return of more than 570% since its initial public offering in 1998, at split-adjusted 5 a share. The Standard & Poor's 500-stock index was up some 11% in that period.

With tech companies in such disarray, posting huge sales and earnings declines, it's hard to believe that Cognizant, a provider of software services and applications for companies making a transition to e-business, won't disappoint the Street when it reports second-quarter results on Tuesday, July 17. But some insiders say Cognizant, which hasn't let the Street down yet, will again at least meet expectations in the second quarter.

Cognizant has completed 18 consecutive quarters of increased earnings and sales. The company's growth -- almost entirely organic, or internal -- has been robust: an annual clip of about 35% in earnings and sales. From $57 million in 1998, sales blossomed to $137 million last year and are expected to hit $187 million this year.

AVOIDING DOT-COMS. Christopher Paul of Salomon Smith Barney expects second-quarter earnings of 29 cents a share, up from 20 cents a year ago and 28 cents in the first quarter. For all of 2001, he sees earnings of $1.18 a share, up from 88 cents a year ago. For 2002, Paul estimates earnings of $1.52.

How has Cognizant dodged the slowdown that has hobbled such bigger competitors as Scient (SCNT) and Viant (VIAN)? One reason: The company, which was a spin-off of Dun & Bradstreet (DNB), avoided doing much business with dot-coms. It concentrated, instead, on the major corporate industry leaders.

Cognizant clients include Pacific Stock Exchange, RadioShack (RSH), First Data, and Royal & Sun Alliance Insurance (RSA). And through business relationships with major software and platform vendors, including Microsoft (MSFT), Oracle (ORCL), and IBM (IBM), it has gained access to projects where its products and services are suited.

Cognizant has also partnered with other info-tech service companies, such as Viant , to provide both application management and integration services to augment Viant's Web-development offerings.

BIG CONTRIBUTORS. Soon to be a client, sources at the company say, is insurance giant MetLife (MET), which went public in April, 2000, and now has a market cap of $23 billion and total assets of $255 billion. Cognizant just signed Coors Brewing, the principal unit of Adolph Coors (RKY), the third-largest U.S. brewing company, as a client. Cognizant will work with Coors on strategic e-business initiatives.

Both Coors and MetLife are expected to potentially contribute huge revenues to Cognizant. In particular, MetLife is expected to add about 5 cents a share to Cognizant's 2002 earnings, according to one insider.

Another of Cognizant's assets is its cadre of 2,000 engineers in seven offices in India, who write software to update old mainfrance and server programs, mostly for financial-service, health-care, and retailing companies. The programmers also write new applications that facilitate e-commerce and Web-based customer communications. These engineers, says one company executive, maintain close relationships with their customers worldwide.

"SUBSTANTIAL DEMAND." Adam Frisch of UBS Warburg says although many projects to integrate systems with the Internet have been put on hold because of IT spending cutbacks and the downturn in the economy, "we believe there will be substantial demand for these services in the long run." Frisch, who has a buy rating on Cognizant, has a 12-month stock price target of 54.

He's bullish on the company because with its specialized skills in linking new Web-based applications with the old back-end systems, he says Cognizant is well positioned to take advantage of that demand recovery -- when it comes. Marcial is BusinessWeek's Inside Wall Street columnist

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