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Computer Sciences Corporation (CSC) is scheduled to announce its second quarter 2012 results on November 9, 2011, and we do witness a substantial variation in analysts’ estimates at this point.

First Quarter Recap

The company reported decent first quarter 2012 results, with earnings per share (EPS) of $1.18, comfortably exceeding the Zacks Consensus Estimate of 70 cents. Computer Sciences generated revenues of $3.91 billion, up 3.06% year over year, driven by the growth across all the company’s business segments. This apart, the company’s acquisition of iSoft has been accretive to the revenue growth.

Across the three lines of business, new business awards for the first quarter were $2.3 billion. NPS and BSS contributed $0.9 billion each and MSS accounted for $0.5 billion of new business.

CSC registered operating margin of 4.46%, down 262 basis points (bps) year over year. The decrease was attributable to an increase in cost of services.

Moreover, the company’s government clients remained apprehensive regarding their fiscal situation and did not initiate new programs. The awards of new contracts were delayed due to uncertain market conditions, which impacted both revenue and margins.

The company exited the quarter with $1.67 billion in cash and cash equivalents, down from $1.84 billion reported in the previous quarter. CSC had total debt balance of $2.42 billion, or a debt-to-capitalization ratio of 26.8%.

The company provided its guidance for fiscal 2012 including the iSoft acquisition. Accordingly, CSC expects new business awards in excess of $17.0 billion, revenues of approximately $16.2 - $17.0 billion, operating margin between 7.00% and 7.50% and EPS of approximately $4.70 - $4.80. Free cash flow is expected to be equal to or greater than 90% of net income for the year.

Agreement of Analysts

Out of the 11 analysts providing estimates for the second quarter, only one analyst revised the estimate downward over the last 30 days. Out of the 10 analysts covering the stock for fiscal 2012, one analyst revised the estimate downward in the last 30 days, while none moved in the opposite direction. Similarly, for fiscal 2013, out of the nine analysts tracking the stock only one analyst lowered estimates in last thirty days.

Some analysts are of the opinion that the retirement of the company’s CEO comes at a crucial time as CSC is dealing with three issues, namely NHS, SEC investigations and a tough government spending environment. On the other hand, the analysts also believe that investors require an increasing amount of comfort with the present issues and/or some idea of the new management’s future plans to get involved in the stock.

According to some analysts, revenues from the NHS contract (which forms a substantial part of its revenues) can serve as a swing factor for quarterly and annual results, as the company never discloses the size of the contract.

Magnitude of Estimate Revisions

The magnitude of revisions is also substantial since CSC reported its second quarter results. Overall, estimates for the upcoming quarter have gone down from 68 cents to 67 cents in the last 30 days. For fiscal 2012, estimates have decreased to $4.38 from $4.40 in the last 30 days. Moreover, for fiscal 2013, the estimates have gone from $4.66 to $4.62 over the same period.

Recommendation

We are apprehensive about the intense competition in the IT and cloud computing space from both big and small players such as Accenture (ACN) and Hewlett-Packard Company (HPQ). Moreover, with government orders expected to dry up to a certain extent and the NHS problem persisting, things look difficult for Computer Sciences.

Moreover, the demand for the company’s products in Europe is not encouraging for the upcoming quarters.

The company has a Zacks #4 Rank, implying a short-term Sell rating.

Source: Computer Sciences Earnings Preview