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Computer Sciences Corp. (NYSE:CSC) is scheduled to announce its third quarter 2011 results on February 9, 2011, and we see a limited number of revisions in analyst estimates at this point in time.

Second Quarter Overview

Computer Sciences’ second quarter 2011 revenue slipped 1.63% from the year-ago period due to the revenue decline in the North American Public Sector (NPS) segment and a negative currency impact. However, Computer Sciences won $4.5 billion worth of new businesses during the quarter.

Operating margin of 7.75% dropped 69 basis points from 8.44% in the year-ago quarter due to the decline in total revenue, which exceeded the fall in operating cost. Earnings per share were $1.18, down from $1.40 reported in the year-ago quarter, but were marginally above the Zacks Consensus Estimate of $1.17.

Computer Sciences delivered a mediocre second quarter. Though the company revised its new business outlook for fiscal 2011 upward, expectations for revenue were lowered. We remain concerned since the divestiture of the Mission Solutions Engineering unit will impact the NPS segment adversely during fiscal 2011.

Guidance

Computer Sciences expects new business awards in excess of $18.5 billion (previously $18.0 billion), revenue in the range of $16.5 to $17.0 billion (previously $16.8-$17.2 billion), operating margin between 8.5% and 9.0% (previously 9% and 9.25%) and EPS in the range of $5.35–$5.45 (previously $5.30 to $5.40). Free cash flow is expected to be equal to or greater than 90% of net income.

Agreement of Analysts

Out of the eleven analysts providing estimates for the third quarter, none made any revision to the estimates in the past thirty days. However, among thirteen analysts providing estimates for fiscal 2011, one analyst revised the estimate upward and another revised it downward in the past thirty days. We noticed a similar movement in fiscal 2012 estimates.

The limited number of changes to estimates also point to the fact that there was no major catalyst during the quarter that could drive results. Consequently, most of the analysts are maintaining the estimates following second quarter earnings.

Most of the analysts believe that Computer Sciences could benefit from the potential market opportunity for information technology and business process outsourcing, stability from its government business as well as improving operating margin and cash flow generation. But lingering concerns around any negative impact from the NHS contract, fear of decelerating pace of business in Europe, continued slowdown of contract awards from the U.S. federal space, and a somewhat back-end loaded guidance for FY11, keep some analysts on the sidelines.

Magnitude of Estimate Revisions

We observed improvements of one and two cents in the Zacks Consensus Estimates for the third quarter and fiscal 2011, respectively, in the past thirty days. Also, estimates for fiscal 2011 increased 7 cents over the past ninety days. The reason for the upward movement could be the recent buyback authorization and dividend hike, which is expected to boost investor confidence on management’s ability to sustain future cash flow and earnings growth.

Recommendation

Computer Sciences is one of the leading players in the information technology services industry. Despite its sequentially weak second quarter, we believe that the company’s fundamentals could outperform in the to-be reported quarter based on new business opportunities. However, contract delays and foreign exchange headwinds and competition from Hewlett-Packard Company (NYSE:HPQ) and Accenture plc (NYSE:HCN) influence our neutral outlook.

Currently, Computer Sciences has a Zacks #3 Rank implying a short-term Hold recommendation.

Source: Computer Sciences: Earnings Preview