Computer Sciences Corporation (NYSE:CSC) is scheduled to announce its third quarter 2012 results on February 8, 2012, and we witness a negative bias in the analysts’ estimates.
Second Quarter Recap
The company reported modest second quarter 2012 results with earnings per share (EPS) of 94 cents, comprehensively beating the Zacks Consensus Estimate of 68 cents. The company’s second quarter 2012 revenues inched up 0.79% year over year to $3.97 billion.
The company witnessed year-over-year revenue growth in the Business Solutions & Services (BSS) and the Managed Service Sector (MSS) segments. Within the commercial segment, strong revenue growth in the BSS segment was somewhat mitigated by the weak MSS performance.
Across the three lines of business, new business awards in the reported quarter were $6.6 billion. North American Public Sector (NPS) contributed $3.1 billion, MSS registered $2.6 billion, and Business Solutions & Services closed $0.9 billion of new business.
CSC posted an operating loss margin of 1.89%, deteriorating considerably from the operating profit margin of 7.75% in the year-ago quarter. The margin was negatively impacted by higher cost of services and a significant goodwill impairment charge during the quarter.
The company exited the quarter with $978.0 million in cash and cash equivalents, down from $1.67 billion reported in the previous quarter. CSC had a total debt balance of $3.26 billion with a debt-to-capitalization ratio of 40.8%.
While guiding for fiscal 2012, the company included the contribution from the iSoft acquisition. CSC expects new business awards in excess of $17 billion; revenues of approximately $16.5-$16.7 billion; operating margin of 6.00% and EPS of approximately $4.05-$4.10. 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 12 analysts providing estimates for the third quarter, only one analyst lowered the estimate over the last 30 days. Out of the 10 analysts covering the stock for fiscal 2012, one analyst lowered the estimate in the last 30 days, while none moved in the opposite direction. Similarly, for fiscal 2013, out of the 13 analysts tracking the stock, three analysts lowered their estimates in the last 30 days, while none moved in the opposite direction.
The company has recently resumed discussions with NHS and Cabinet officials regarding the memorandum of understanding (NASDAQ:MOU), which included proposed re-negotiated terms of the contract. However, the company later on informed that neither the MOU nor the most recently discussed contract amendment would be approved by the UK government.
As a result of this new development, CSC would have to realize a material impairment in the third quarter of 2012 on its net investment in the contract. This impairment could be equal to CSC's net investment for the contract ($1.5B as of Nov. 30, 2011) and may also include some other costs, leading CSC to lower its previously provided fiscal year 2012 guidance.
Analysts are also of the opinion that issues other than the NHS contract may pose a considerable challenge to CSC. These include the Audit Committee investigation into CSC's accounting practices initiated in May 2011, which will lead to significant legal and accounting costs.
Secondly, the company is also entangled with a class action lawsuit by multiple shareholders who allege violations of securities laws in connection with business representation. A decision on the same issue is pending, and may result in potential losses if it goes against the company.
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 $1.17 to 57 cents in the last 90 days.
For fiscal 2012, estimates have decreased to $3.68 from $4.30 in the last 90 days. Moreover, for fiscal 2013, the estimates have gone down from $4.62 to $3.71 over the same period.
We are apprehensive about the intense competition in the IT and cloud computing space from both big and small players such as Accenture (NYSE:ACN) and Hewlett-Packard Company (NYSE:HPQ). Moreover, with government orders expected to dry up to a certain extent and the NHS problem persisting, lingering legal issues are also making it 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 #5 Rank, implying a short-term Strong-Sell rating.