Cognizant Technology Solutions Corp (CTSH): Driving By Morgan Stanley’s $60 Price Target

Cognizant Technology Solutions Corp (NASDAQ:CTSH) is ripping it up today. Shares of the technology stock are up more than 5% as we type thanks to an upgrade from Morgan Stanley.

The research house moved CTSH out of the "Equal Weight" column into the "Overweight" side of the ledger with a shiny new price-target of $60.00 – 19.5% upside to target as of this keystroke.

Cognizant provides information technology (IT), consulting, and business process services worldwide. The company operates in four segments: Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other.

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Morgan Stanley says of CTSH, "We upgrade Cognizant to Overweight and establish a $60 price target on accelerating recovery in discretionary spend highlighted in our leading indicator model. We believe upside is not embedded in expectations and see room for upward estimate revisions and share price movement heading into 2H14."

To justify $60, the firm explains, "We establish a $60 price target, up from our previous base case of $45.50, which applies 20x P/E multiple on 2015 EPS of $3.00, above consensus EPS of $2.88. We model 20% revenue growth in 2014 and 19% in 2015, above the Street's 17% and 16% and our previous forecast of 17% and 15%."

Since the analyst is using price-to-earnings (P/E) to determine the price-target for Cognizant Tech, let's look at the company recent P/E history to determine is $60 is too high, too low or just right?

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In the last half-decade, the business services company traded with an average P/E of 48.59 with a range of 27.75 to 68.87. During the same timeframe, CTSH earnings grew at an average annual rate of 23.18%. That means Wall Street's been willing to pay two times earnings growth for the promising tech company.

Analysts believe the bottom line will increase by 16.30% this year and 16.20% in 2015. Using the same 2 to 1 P/E to earnings growth premium, Cognizant would have a P/E in the 32.6 and 32.4 zip codes for '14 and '15, respectively. At Morgan's $3.00 estimate for 2015, CTSH would price out at $97.20 – well above target.

Cognizant Tech's peers trade with an industry average P/E of 44.39, but typical revenue growth of just 13%, less than CTSH's projected increases for this year and next.

Overall: No matter which you look at it on a P/E basis, Cognizant Technology Solutions Corp (NASDAQ:CTSH) should have no problem with Morgan Stanly's $60 price target if CTSH hits the research firm's 2015 EPS estimate of  $3.00.