Earnings Preview Blog: CSC

Computer Sciences Corporation (CSC - Analyst Report) is scheduled to announce its first quarter and fiscal year 2011 results on August 11, 2010 and we do not see substantial variation in analyst estimates at this point.
 
Fourth Quarter Overview
 
The company reported decent fourth quarter 2010 numbers, with EPS of $1.66 exceeding the Zacks Consensus Estimate of $1.44, although earnings declined compared with the year-ago quarter. CSC delivered revenue of $4.2 billion, up 2.4% from $1.03 billion reported in the year-ago quarter, driven by strength across all segments except Business Solutions and Services.
 
The company won $4.3 billion worth of new business awards in the fourth quarter. Of the three lines of business, NPS accounted for $1.4 billion of new business wins, BSS $0.8 billion and MSS $2.1 billion.
 
CSC recorded an operating margin of 10.10%, down 76 basis points from 10.9% reported in the year-ago quarter. The margin was negatively impacted by the substantial increase in cost and expenses that offset the positive impact of revenue growth. Moreover, CSC is cash rich and exited the quarter with cash and cash equivalents of $3.74 billion, and its debt to capitalization ratio improved 6.5 percentage points to 36.5%.
 
During the fourth quarter conference call, management reiterated its guidance for fiscal year 2011. The company now expects new business awards in excess of $18.0 billion, revenue in the range of $16.8 to $17.2 billion, operating margin of between 9% and 9.25% and EPS in the range of $5.30 to $5.40. Free cash flow is expected to be equal to or greater than 90% of net income.
 
Agreement of Analysts
 
Out of the thirteen analysts providing estimates for the first quarter, only one has lowered estimates in the last thirty days, while there were no upward revisions. Out of the fourteen analysts tracking the stock for fiscal year 2011, only one analyst has revised estimates downwards in the last thirty days, while two analysts moved in the opposite direction.
 
The limited number of changes to estimates also points to the fact that there were no major catalysts during the quarter that could drive changes to estimates. Consequently, analysts are sticking to the estimates projected post fourth quarter earnings. 
 
Some analysts have revised their estimates, as they are concerned about pressures in the U.S. federal business, which constitutes around 40% of total revenues. The analysts believe that revenues may be impacted by tighter US government budgets, which are increasingly being set aside to finance the fiscal deficit, for funding increasing defense expenditure and the more stringent order procurement procedure implemented by the Obama Government.
 
This apart, analysts are also concerned about Hewlett-Packard Company’s (HPQ - Analyst Report) recent IT restructuring process, which is expected to intensify the competition in the IT outsourcing space, which may inturn negatively impact CSC.
 
On the other hand, some analysts are positive about CSC’s recent win at the U.K.’s National Health Services (NHS). This apart, some analysts are also bullish about the healthy bookings growth, and believe it to be resilient.
 
Magnitude of Estimate Revisions 

The magnitude of revisions is also minimal since the company reported its fourth quarter results. Overall, estimates for the upcoming quarter have gone down from 91 cents 90 days ago to 90 cents (current), with no changes in the Zacks Consensus estimate over the past 30 days. 

For fiscal year 2011, estimates have gone up from $5.22 90 days ago to $5.30 (current). Over the past 30 days, estimates have increased by 1 cent. For 2012, estimates have gone down from $5.68 90 days ago to $5.66 (current), with estimates moving down by 4 cents over the last 30 days. 

Recommendation 

We are optimistic about the company’s positive outlook for fiscal year 2011, its enhanced product portfolio, growing customer base and the revival in the macroeconomic scenario. The company is constantly growing through acquisitions that enhance its services portfolio and expand its operations in new markets. It has a steady flow of new business, and is financially sound.
 
On the other hand, we are a bit concerned about the intense competition in the IT and cloud computing space from both big and small players such as Accenture plc (ACN - Snapshot Report) and Hewlett-Packard Company.
 
We have a Neutral rating on CSC, with a short term Zacks rank of #3 (Hold).

Read the full analyst report on CSC

Read the full analyst report on ACN

Read the full analyst report on HPQ