Computer Sciences Corporation: Restructuring Progress Triggers Strong Outlook

| About: Computer Sciences (CSC)

Shares of Computer Sciences Corporation (CSC) jumped 26% over the past week. The company reported decent first quarter results on Wednesday. Furthermore, Computer Sciences is confident about the rest of its fiscal 2013.

First Quarter Results

Computer Sciences Corporation reported first quarter revenues of $3.96 billion, down 1.9% compared to last year. Excluding currency headwinds, revenues would have risen 0.7%. The company reported diluted earnings per share of $0.26, compared to earnings of $1.17 last year. Last year's earnings included a one-time tax benefit of $0.78 per share.

The company continues to simplify its business model in an attempt to save costs and speed up decision making. Management anticipates realizing $1 billion in cost savings in the next 18 months.

CEO Mike Lawrie commented on the results:

Our first quarter performance reflects a first step in turning around CSC. While there is significant work ahead of us, I am pleased with our initial progress on operating margins and free cash flow. We have launched several action plans which will transform the company over the next several years and create value for our shareholders.

Segmental Information

Managed Services Sector

The division reported a 1.0% increase in revenues to $1.64 billion. Excluding currency headwinds, revenues would have risen 4.8%. Operating margins increased 525 basis points to 5.8%, with operating profit coming in at $95 million. The prospects for the coming quarters are good as the division signed $2.2 billion in new orders during the quarter. Bookings were driven by new contracts from Alstom and leading financial service providers in the U.S.

Business Solutions & Services

The business division reported a 2.5% increase in revenues to $985 million. In constant currencies, growth came in at 7.0%, driven by the ISOFT acquisition. Operating margins fell by 430 basis points to 1.6% as a result of dilution from the acquisition. Operating income fell 72% to $16 million. The division reported new contracts of $0.9 billion during the quarter.

North American Public Sector

Revenues in the NPS divisions fell 7.8% to $1.37 billion as a result of the completion of the defense contracts. Operating margins fell 60 basis points to 7.4%, resulting in operating profits of $101 million. New bookings totaled a mere $0.9 billion, suggesting further future revenue declines. The Defense Department makes up for 67% of total division revenues. CSC is feeling the impact of cuts on the defense budget.


For the full year of its fiscal 2013, the company targets a 200-300 basis point improvement in operating margins. This translates into a 5.4-6.4% operating margin target. Assuming a $16 billion revenue base from last year, this would translate into $864-$1.02 billion operating profit target.

The company hopes to achieve $500-$600 million in cost reductions in its fiscal 2013, most of it hitting the bottom line. It anticipates earnings per share of $2.10-$2.30 for the year. The company continues to keep a close eye on its 40 identified troubled contracts, including the multi-billion contract with the National Health Service.


The company ended its first quarter with $1.0 billion in cash and equivalents. The company operates with $2.7 billion in short- and long-term debt, for a net debt position of roughly $1.7 billion. For the full year of 2012, the company reported annual revenues of $15.9 billion. A goodwill charge and dismal operating performance resulted in a $4.2 billion net loss. The market values CSC at $4.9 billion, or 0.3 times annual revenues.

The valuation compares to a revenue multiple of 0.3 times for troubled Hewlett-Packard (HPQ). Other big IT conglomerates, including IBM (IBM) and Cognizant (CTSH), trade at 2.1 and 3.2 times annual revenues, respectively.

Currently, Computer Sciences Corporation pays a quarterly dividend of $0.20 per share for an annual dividend yield of 2.5%.

Investment Thesis

Shares of Computer Sciences Corporation trade with year to date gains of 32%. Shares jumped to $33 in February when the company announced its restructuring plans. Shares steadily drifted downward to $23 in July amidst worries about the economy, and diminished prospects for the American public sector division amidst spending cuts. After last week's jump, shares trade around the $31 mark.

Long-term investors have not seen any returns on CSC over the past decade. Shares traded within a $20-$60 price range, down 15% compared to ten years ago. Investors are hoping that the company finally is seriously tackling its long-term issues. Investors react with relief and are encouraged as they see the improvements in the first quarter. Notably the strong contract awards at the company's Managed Service Sector came as a positive surprise.

The company notes that the urgency for change and improvement is felt throughout the organization. Furthermore, the company faces two strong headwinds. Its European businesses are struggling amidst the recession on the continent, while the discussions about the "fiscal cliff" are delaying contract award decisions in the U.S. federal businesses.

Investors react favorably on the back of the strong guidance. A guidance for earnings of $2.10-$2.30 per share seems rather strong given the troubled state of the business, the European headwinds and the U.S. "fiscal cliff" discussions.

At these levels, valuations seem rather compelling. Revenue multiples are among the lowest in the industry, in anticipation of further earnings growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.