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Critical Comparison: Cognizant Technology Solutions Corporation (CTSH) vs. CA, Inc. (CA)

Cognizant Technology Solutions Corporation (NASDAQ:CTSH) and CA, Inc. (NASDAQ:CA) are the two most active stocks in the Business Software & Services industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect CTSH to grow earnings at a 14.64% annual rate over the next 5 years. Comparatively, CA is expected to grow at a 0.60% annual rate. All else equal, CTSH’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Cognizant Technology Solutions Corporation (CTSH) has an EBITDA margin of 16.04%, compared to an EBITDA margin of 38.01% for CA, Inc. (CA). This suggests that CA underlying business is more profitable. CTSH’s ROI is 12.80% while CA has a ROI of 9.90%. The interpretation is that CTSH’s business generates a higher return on investment than CA’s.

Cash Flow 

The amount of free cash flow available to investors is ultimately what determines the value of a stock. CTSH’s free cash flow (“FCF”) per share for the trailing twelve months was +0.63. Comparatively, CA’s free cash flow per share was +0.43. On a percent-of-sales basis, CTSH’s free cash flow was 2.76% while CA converted 4.49% of its revenues into cash flow. This means that, for a given level of sales, CA is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. CTSH has a current ratio of 3.40 compared to 1.30 for CA. This means that CTSH can more easily cover its most immediate liabilities over the next twelve months. CTSH’s debt-to-equity ratio is 0.09 versus a D/E of 0.48 for CA. CA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CTSH trades at a forward P/E of 16.62, a P/B of 4.06, and a P/S of 3.03, compared to a forward P/E of 13.12, a P/B of 2.36, and a P/S of 3.47 for CA. CTSH is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CTSH is currently priced at a -4.81% to its one-year price target of $75.83. Comparatively, CA is 1.4% relative to its price target of $32.95. This suggests that CTSH is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for CTSH and 3.10 for CA, which implies that analysts are more bullish on the outlook for CA.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CTSH has a beta of 1.11 and CA’s beta is 0.82. CA’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. CTSH has a short ratio of 2.24 compared to a short interest of 2.59 for CA. This implies that the market is currently less bearish on the outlook for CTSH.

Summary

Cognizant Technology Solutions Corporation (NASDAQ:CTSH) beats CA, Inc. (NASDAQ:CA) on a total of 9 of the 14 factors compared between the two stocks. CTSH is growing fastly, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. CTSH is more undervalued relative to its price target. Finally, CTSH has better sentiment signals based on short interest.

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