Computer Sciences Corp: A Buy / Write Opportunity 5 comments
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"Computer Sciences Corporation (CSC) is a player in the information technology (IT) and professional services industry. It offers services to clients in the global commercial and government markets. Its service offerings include IT and business process outsourcing, and IT and professional services. It provides business process outsourcing, managing key functions for clients, such as procurement and supply chain, call centers and customer relationship management, and logistics. IT and professional services include systems integration, consulting and other professional services. Systems integration encompasses designing, developing, implementing and integrating complete information systems. Consulting and professional services includes advising clients on the acquisition and utilization of IT and on business strategy, security, modeling, simulation, engineering, operations, change management and business process reengineering."
Company description by MSN MoneyCentral
Computer Sciences looks set to finish FY 2008 (ended March 31) with its fourth consecutive year of higher EPS. Consensus views for the just completed year now center on $4.01 - $4.05 up from FY 2007’s $3.84/share.
Revenues also appear to have hit record high levels at about $17.2 billion. Despite all the decent news, CSC shares now trade at < 9.5x trailing earnings and about 9.3x forward expectations.
About 40% of sales come from outside the US so reported earnings have been hurt by the stronger dollar. If the dollar weakens in the future as I expect, this trend will reverse with currency translations helping EPS.
Value Line rates Computer Sciences' financial strength as ‘A’ and rates their shares ‘above average’ for safety. They also note that CSC’s ‘earnings predictability’ falls in the 90th percentile (with 100th being best).
Here are the per share numbers as reported by Value Line. FY 2008 data includes estimates for Q4 (ended March).
FY ……. Sales ….. C/F ….. EPS …... B/V ….... Avg. P/E
2004 … 73.53 ….. 8.09 …. 2.59 ….. 33.97 ….. 18.3x
2005 … 78.05 ….. 9.17 …. 3.33 ….. 36.17 ….. 14.5x
2006 … 85.72 ….. 9.95 …. 3.62 ….. 33.96 ….. 14.5x
2007 …109.18 ….12.25 … 3.84 …..36.14 …...13.7x
2008 …113.55 ….13.00 … 4.05 …..40.10 …...10.7x
The valuation on these shares is now lower than any time since the depths of 2002’s bear market and last November’s nadir. A rebound to a still below average multiple of 12x forward earnings would lead to a price of at least $49 /share.
Is that reasonable to expect? Sure. CSC shares have traded at $50.50 and higher at some point in each calendar year from 2004 right through 2008.
Fundamentals are better now in every category than during that five year period.
Here’s a nine-month buy write combo that looks good right now:
………………………………… Cash Outlay ……… Cash Inflow
Buy 1000 CSC @$37.98 ……….. $37,980
Sell 10 Jan. $40 calls @$4.40 ………………………… $4,400
Sell 10 Jan. $40 puts @$6.10 …………………………. $6,100
Net Cash Out-of-Pocket ………… $27,480
If CSC shares rise by 5.4% to over $40 by January 16, 2010:
- Your $40 calls will be exercised.
- You will sell your shares for $40,000.
- Your $40 puts will expire worthless (a good thing for you as a seller).
- You will have no further option obligations.
- You will hold no shares and $40,000 cash for your initial outlay of $27,480.
That’s a best-case scenario profit of $12,520 for a 45.5% cash-on-cash return.
Not too shabby for a nine-month holding on shares that only needed to rise by 5.4% or better from trade inception.
What’s the static return if the shares go nowhere?
- Your $40 calls would expire worthless.
- Your $40 puts would be exercised.
- You would be forced to buy another 1000 shares and to lay out an additional $40,000 cash.
- You will have no further option obligations.
- You would now own 2000 shares of CSC worth $75,960.
- Your total cash out-of-pocket would be the original $27,480 plus the extra $40,000 when the puts were assigned = $67,480.
If you liquidated all 2000 shares you would have a profit of $8,480 on shares which did not go up from trade inception.
What’s the break-even on the whole trade?
On the first 1000 shares it’s the purchase price of $37.98 less the $4.40 /share call premium = $33.58 /share.
On the puts it’s the $40 strike price less the $6.10 /share put premium = $33.90 /share.
Your break-even is the average of $33.58 and $33.90 = $33.74 /share.
Thus, even if CSC shares decline by up to $4.24 or (-11.1%) you will not lose money on this trade.
Disclosure: Author is long CSC shares and short CSC options.
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You give out at least two trades everyday or more than 500 a year.
Do you think that's too many?
Too bad they waited for an 11 point move before getting in though.
Aggressive Growth - Computer Sciences Corp. August 18, 2009
From - ZACKS.com
Computer Sciences Corp. (CSC - Snapshot Report)) easily beat Wall Street's expectations and share are setting new 52-week highs.
Company Description
CSC offers a variety of services included outsourcing, systems integration, consulting, and e-business solution to global companies and governments.
Crushed Estimates
On Aug 6 CSC reported great first-quarter results, for fiscal 2010, despite a decrease in revenue. Earnings per shares came in at 74 cents, more than 45% higher than the Zacks Consensus Estimate which was 51 cents.
This was the company's third consecutive surprise.
Estimates Climb
Following the report all 11 analysts provided full-year estimates increased their forecast. The Zacks Consensus Estimate for this year is now $4.92, up from $4.09 over the past 3 months.
The average projection for next year is currently $5.11, up from $4.30 in that time span. These estimates would yield annual growth rates of 20% and 4%, respectively.
Trading at a Discount
One share of CSC will cost you less than 10 times forward earnings. Currently the PEG ratio is just over 1.0. Both levels are lower than the industry norm.
BARRON’S TAKE …
Xerox’s $6.4 billion purchase of Affiliated Computer Services signals further consolidation in the information technology sector.
TODAY’S ANNOUNCEMENT by Xerox (XRX) that it will acquire computer services firm Affiliated Computer Services (ACS) for $6.4 billion will likely be copied by other firms. For it’s a strong sign that buyers are finally getting financing after the worst credit squeeze in decades, and that sellers are smart enough to cash out.
This suggests that the best way to play this is to consider buying shares of companies similar to ACS, including Infosys (INFY) and the other Indian IT firms, rather than Xerox shares. Xerox has now become more heavily leveraged despite the higher earnings afforded by ACS.
Xerox shares plunged $1.57, or 17.5%, on the news, to $7.41, while ACS shares advanced $6.05, or 13%, to $53.31.
If a deal had been on the table before today, ACS was clearly right to hold out as the stock’s 15% gain this year has come with a tremendous expansion of its multiple from about 11 to 15 times this year’s expected-earnings per share.
The deal will certainly boost Xerox’s pretax earnings, but it also saddles the company with a tremendous amount of debt. And give credit where due: incoming CEO Ursula Burns, who’s been with Xerox for nearly 30 years since starting as an intern, and who just took over in July, is acting boldly to change Xerox’s stodgy image.
But who will want to babysit the stock while all the financial complexity and market risk play themselves out?
Xerox already had $6.3 billion in net debt at the end of its June quarter and will now add $1.3 billion of ACS debt, after factoring in the company’s cash. The cash portion of the deal, roughly $1.7 billion, could bring net debt to $9 billion.
The resulting leverage is certainly manageable. With projected earnings before interest, taxes, depreciation and amortization of about $3.4 billion annually, Xerox’s debt-to-Ebitda of roughly 2.7 times is comfortable.
But raising the financing could conceivably involve share issuance, which would dilute earnings. More important, it’s not clear just what Xerox’s game plan is here. The “Document Company,” as Xerox is known, has some overlap with ACS, but more in terms of the customer base, not the business itself.
ACS takes care of things that information technology (IT) departments handle, like managing large applications for payroll and such. Xerox manages so-called “workflow,” meaning the ways in which documents go from being formatted digitally to printed and distributed on paper.
Do these things belong together? Most certainly. Is that worth $6.4 billion to Xerox? It’s unclear.
“They both go after big companies and government contracts,” observes Peter Falvey, an M&A consultant with Revolution Partners, which advised Xerox on previous deals. “But what they do is relatively different.”
The deal will certainly boost Xerox’s growth, albeit slightly. ACS’s Ebitda margin of 17% is significantly higher than Xerox’s 13%, and ACS, on the other hand, is expected to turn in 7.5% sales growth this year and 6.2% next year, compared to Xerox’s expected 17% decline this year and half-percent rise next year.
But why stick around through all the work involved when there are targets out there to be acquired and the will on both sides to strike deals?
The deal, coming just a week after Dell’s (DELL) $3.9 billion buy of Perot Systems (PER), is the latest sign that the tech world believes holding customers’ hands will guarantee more stable equipment sales. The purchase by Hewlett-Packard (HPQ) in August of 2008 for $13.9 billion shows there’s a willingness to pay much larger sums.
Who could be next? Shares of Accenture (ACN), with a $27 billion market cap would be a big one to swallow. Its stock was up about five percent today. Computer Sciences Corp. (CSC), up five percent, would be much easier to manage at $8 billion in market cap.
Infosys, with $2.5 billion in cash and equivalents and no long-term borrowings, could be a target. A merger of equals, moreover, with Accenture or CSC, would vault the firm to a totally different level of credit with top-tier customers.
In time, the ACS purchase may prove itself to be Burns’ most brilliant first strike in her new role as CEO. There’ll be plenty of time to check back in with the stock if and when that comes true. In the meantime, you’ll probably get a better return investing in Accenture, CSC, Infosys, or one of a myriad of other, smaller IT shops.