By Paul R. La Monica

It's not a great time to run a business that helps companies outsource, but it could be a good time to buy Cognizant Technology Solutions stock.

American companies with a big workforce overseas could get whipsawed as both Kamala Harris and Donald Trump push for more jobs in the U.S. and "nearshoring" with allies closer to home. This may be one reason why Cognizant, a leading provider of outsourcing services for the healthcare and financial sectors, is getting the cold shoulder from investors. Although the company is based in Teaneck, N.J., nearly 75% of its employees are based in India.

The stock is down 1.4% this year after falling 3%, to $74.50, on Thursday along with Indian peers after rival Tata Consultancy Services reported earnings that missed forecasts; Cognizant trades for only about 15 times 2025 earnings estimates, a larger-than-usual discount to the S&P 500.

But as Cognizant prepares to report third-quarter earnings on Oct. 30, it has a plan to boost growth thanks to an acquisition that will expand its customer base in a rapidly growing area: aerospace and defense: Cognizant bought Belcan, a provider of engineering research and development services, for $1.2 billion earlier this year.

Cognizant CEO Ravi Kumar S told Barron's that the addition of Belcan, whose customers include the U.S. Navy, Airbus, NASA, and Rolls-Royce, will help Cognizant diversify its business. "Belcan is a formidable player in aerospace, which is an area we were not participating in," he said.

The Belcan deal should boost overall revenue in the near term. Jefferies analyst Surinder Thind said in a report after the acquisition closed in August that Belcan could add between $200 million and $300 million in revenue over the rest of 2024. He also thinks that Belcan will be accretive to Cognizant's earnings by 2026.

Kumar S said that Cognizant is also hoping to expand Belcan's list of consulting clients into sectors beyond aerospace, such as telecom and manufacturing. The company should also benefit from the increased global demand for healthcare thanks to its TriZetto Healthcare software business, he added. Wall Street expects Cognizant's healthcare revenue to grow almost 5% to about $6 billion next year and another nearly 10%, to $6.6 billion, in 2026.

Cognizant is making a bigger push into artificial intelligence too. It announced an AI cybersecurity partnership with Palo Alto Networks earlier this month that will help mitigate cloud risks and boost threat detection for corporate customers. Kumar S said the AI opportunity for Cognizant is "extraordinary."

Analysts also seem to recognize the potential tailwinds and expect profits to pick up steam over the next few years. Consensus forecasts call for nearly 10% earnings-per share-growth in 2026, up from forecasts for a 7% increase in 2025. Thind has a Buy rating on Cognizant and a $90 price target, up more than 20% from recent levels.

And while Kumar S acknowledged that geopolitical concerns are making this an "unusual time" for the company, he is confident Cognizant will adapt to any further deglobalization shifts. "We help clients outsource and offshore, but we also near-shore and insource as well," he said, noting that the company is boosting its presence in Latin America and Eastern Europe.

Even if the business world becomes more insular, Cognizant should be able to post steady growth -- regardless of the whims of political leaders in the U.S. and around the globe.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

October 11, 2024 01:30 ET (05:30 GMT)

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