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.
CSC’s bookings and its bookings-to-revenue ratio provide the investor with a notion of the direction the Company’s revenue may be heading. If CSC’s bookings-to-revenue ratio remains less than one times for more than two consecutive fiscal years, then the Company is at risk of experiencing a contraction in its revenue. If the bookings-to-revenue ratio remains near one times or greater for more than two consecutive fiscal years, then future revenue is likely to continue to grow. For a company like CSC, which is dependent on long-term contract awards, this ratio needs to be monitored closely.
For fiscal year 2010, CSC’s bookings totaled $19.2 billion, exceeding both the Company’s expectations and the Company’s $16.1 billion of total revenue. One should note that 70% of CSC’s fiscal year 2010 bookings were from new clients and/or from new services, thus implying that the Company is successfully growing its services and client base. This feat will be more impressive if the Company is able to maintain its historical ability to continue to gain new contracts from existing clients. Furthermore, Company management believes that such strong bookings in fiscal year 2010 indicate a recovering economy and expects bookings for fiscal year 2011 to exceed $18 billion.
Even if the economy does not recover like CSC’s management believes, the Company’s fiscal year 2011 revenue will have a low probability of dropping far into the $15 billion range – if it does drop. Given the fact that bookings-to-revenue have been approximately one times or greater in three of the last four fiscal years, implies that revenue in fiscal 2011 - on a constant currency basis – has limited downside and assuming very few contract cancellations a significant amount of upside. Moreover, bookings will probably not have to be $18 billion or more for fiscal year 2011 to maintain revenue near the current level into fiscal year 2012. Although there is a chance that contracts can change or be canceled, the prior bookings provide the investor a degree of safety and stability when considering CSC’s revenue in during both good and bad times.
Looking at fiscal year 2009, which includes the crisis of 2008, one can see that the Company posted both strong revenue and bookings numbers, despite having mediocre bookings in fiscal year 2008. Basically, the bookings provide the Company some margin for error and unexpected events.
Disclosure: Long CSC