Chain Bridge Investing’s (“CB” or “we” or “our”) evaluation of Computer Sciences Corporation (“CSC”, “Computer Sciences Corp.” or the “Company”) is based primarily on fundamental factors such as past, current and potential operating performance, as well as the Company’s current competitive environment. There is no guarantee that the market price of the Company will eventually reflect its implied value as derived from fundamental factors. This post, along with the others in this series, does not analyze the technical aspects of the Company’s stock price and its volume patterns. Furthermore, the reader should note that this post is one of multiple posts by Chain Bridge Investing regarding CSC.
The relative stability witnessed in CSC’s historical operating results are in part a result of CSC’s clientele, diversification of revenue, and new work generated from existing clients.
CSC’s client base includes more than 2,500 global clients with no commercial-sector client representing more than 10% of revenue. Of course, one may argue that nearly 39% of the Company’s revenue has exposure to the federal government budget and spending initiatives. Nevertheless, CSC’s revenue from the federal government is derived from many contracts with various agencies (both defense and civil). Not a single contract in NPS represents more than 2% of CSC’s total revenue.
Moreover, CSC’s commercial-sector clients are spread amongst the following five industry verticals: (1) Financial Services; (2) Manufacturing; (3) Technology and Consumer; (4) Chemical, Energy and Natural Resources; and (5) Healthcare. CSC provides its services to some of the largest companies in each industry vertical. Having an established presence in each of the above listed verticals allows CSC the ability to build industry expertise and create tailored solutions for each industry, thus enabling them to better compete for future jobs with other Companies.
CSC has a global client base, although nearly 90% of its revenues are derived from the U.S. and Europe. Despite the challenges of dealing with unpredictable currency fluctuations and their effects on operating results, we consider a globally diversified client base to be a positive for CSC. Such diversification will help the Company to eschew and offset some of the negative headwinds that could be occurring in one location. Nevertheless, in regards to diversification, we would like to see more Latin America and Asian exposure in the future. The Company has made efforts to expand its presence in both Asia and Latin America, however, such expansion will take time and is prone to set backs as witnessed in fiscal year 2010.
Unique to CSC is the large revenue exposure it has to the public, approximately 39%, and the commercial sector, approximately 60%. Historically, the public sector has exhibited resilience in times of recession, thus normally mitigating the impact of decreased business from the commercial side. Yet, in the current environment there is still the possibility that both the commercial and public sector will face headwinds, especially as there are new pressures to reduce federal spending (discussed below). For a long-term investment, such positioning amongst both sectors is quite beneficial. Furthermore, the Company can use techniques it has acquired from either sector to help improve its services to the other. Again, this mix of revenue plays to CSC’s competitive advantage, the stability of its revenue, and its future potential at gaining additional revenue.
Furthermore, as is the nature with good information technology and outsourcings companies, CSC continues to build strong relationships with its customers. At present, existing customers account for approximately 80% of CSC’s revenue, thus providing the Company with recurring business and providing a degree of stability in the Company’s revenue. For example, in fiscal year 2010, the Company was awarded new contracts from Zurich Financial ($2.9 billion), United Technologies Corporation ($1.5 billion), and Raytheon ($1.4 billion) – all existing CSC clients. Also, the nature of CSC’s outsourcing and some of its IT services lends itself to high switching costs, adding an additional reason for a customer to continue to employ the services of CSC.
Disclosure: Long CSC