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The technology-outsourcing industry, once red-hot, has cooled as clients embrace cloud computing and greater automation. To offset the loss of momentum, Cognizant Technology Solutions, a leader in information-technology services, is investing in digital consulting, a fast-growing business that now accounts for 25% of the company’s revenue, compared with almost nothing five years ago. So far, the bet is paying off. Cognizant shares rose 43% in the past year, to a recent $73, and could add another 15%, at least, as earnings growth reaccelerates.

For Cognizant (ticker: CTSH) shareholders, the payoff could be twofold, thanks to activist investor Elliott Management, which took a 4% stake last November, acquired three board seats, and pressed management to prioritize profit-margin expansion over rapid revenue growth. Elliott also urged Cognizant to return some of its hefty cash flow to investors, and management agreed. The company will return $3.4 billion through 2018 via stock buybacks and dividends; in April, it initiated a payout of 60 cents a share, for a yield of 0.8%.

Yet Elliott’s exertions wouldn’t matter much if Cognizant weren’t on the right path in the first place. Founded in 1994 as the offshore tech department of Dun & Bradstreet and taken public in 1998, the company has long focused on the financial-services and health-care sectors, which together accounted for almost 70% of last year’s revenue of $13.5 billion. While such specialization was a handicap in the IT industry’s glory days, the growing digital and data-analytics demands of both sectors now give Cognizant an advantage over Indian outsourcing rivals such as Infosys (INFY) and Tata Consultancy Services (TCS.India), which offer more-commoditized services. Cognizant has its headquarters in Teaneck, N.J., but about 75% of its workforce is in India.

“If you think technology is going to proliferate, Cognizant is a critical part of the story,” says Cowen analyst Bryan Bergin, who rates the stock Outperform, with a 12-month price target of $80. “Continued complexity leads to a need for their services,” which include helping clients master the digital world, from data-mining to mobile transactions.

In IT’s good old days, Cognizant routinely posted annual revenue gains of 20% or more. Last year, revenue rose 8.6%, the smallest increase ever, and net income fell 4%, to $1.6 billion, or $3.39 a share, as certain health-care clients postponed spending due to merger-related activity. This year, things are going better; Cognizant beat estimates in the first and second quarters, as client spending resumed. Full-year earnings are expected to rise more than 30%, to $2 billion, or $3.71 a share, fueled by profit-margin expansion and stock buybacks, on a 10% jump in revenue, to $14.8 billion.

Analysts have forecast $4.34 a share in earnings for 2018, owing partly to projected buybacks. (Cognizant reports earnings excluding stock-based compensation, which Barron’s has long argued is a corporate expense. The company is expected to earn $3.43 a share this year and $3.92 in 2018 based on generally accepted accounting principles, or GAAP, which reflect stock-based compensation and other costs.)

Guided by Elliott, Cognizant has committed to raising its profit margin to 22% by 2019 from a historical 19% to 20%. Margins could widen as the company reduces head count by a planned 6,000 to 10,000, in part through attrition, and redeploys workers in more effective ways. In February, management outlined a plan to boost margins by 3.6 to 4.4 percentage points—via cost cuts and other measures—by 2019.

Some of these savings will be offset by investments in a more highly skilled workforce operating closer to clients. The company has been retraining workers in data analytics and design, and setting up centers closer to major universities to attract top talent, especially in the U.S.

Under CEO Francisco D’Souza, 49, who co-founded the company at D&B, Cognizant also has agreed to return 75% of its U.S.-generated free cash flow to shareholders beginning in 2019. That is about a third of overall free cash, expected to total $2.4 billion by then. Until now, the company has used much of its cash to repurchase shares to offset dilution related to stock compensation and expand its workforce.

EVEN AFTER THE STOCK’S latest rally, shares trade for 17 times next year’s expected earnings, below their five-year average of 17.5 and at a steeper-than-usual discount to rival Accenture (ACN), which sports a price/earnings ratio of 19. “They are running and chewing gum at the same time by trying to grow their digital business and improve margins,” says Lisa Ellis, a senior analyst at Bernstein, who says the market is skeptical, given the stock’s depressed P/E. “I see this as a straightforward execution story over the next several quarters. They have talked about their plans with a high level of specificity.”

Ellis thinks Cognizant’s stock could hit $84 in the next year, 15% above last week’s level, based on her view that earnings will grow at a midteens rate in the near term, helped by margin improvement. Additionally, large banks could begin spending on technology again after years on the sidelines, and clients could speed the growth of their digital businesses. In that case, Cognizant’s shares could earn a higher multiple. Ellis has above-consensus earnings estimates of $4.52 a share for next year and $5.33 for 2019.

Cognizant’s digital business grew 30% in the June quarter and is gaining more momentum. CEO D’Souza has said customers are switching from pilot programs to wider adoption of digital services. The number of customers using Cognizant’s consulting services, a good proxy for long-term revenue growth, is also rising. But it is still early days. “Clients are only beginning on their journey to transform operating and technology models, and this is where the largest area of opportunity lies,” D’Souza wrote in an email.

One potential caveat is political: President Donald Trump is seeking to curb the issuance of H-1B visas for highly skilled foreign workers, whom many tech companies, including Cognizant, have relied on. Cognizant halved the number of visas it applied for this year relative to 2016.

Bears fear the company could face higher labor costs if the administration curtails visa use, but Wedbush analyst Moshe Katri, who rates the stock Outperform, says there is only about a $10,000 gap between the salaries Cognizant pays H-1B visa holders and U.S. residents, half the amount assumed by bearish analysts who study generic salaries attached to visa applications.

Cognizant has said it expects no major profit-margin hit from changes in the composition of its staff. Besides, if immigration-related issues lead to a selloff in the shares, it would be a good reason to buy more.

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