CSC Replaces Existing BAE Contract

Global technology leader Computer Sciences Corp. (CSC - Analyst Report) recently announced that it has inked a new five-year deal with global defense and security company, BAE Systems worth approximately $160.0 million a year. The new deal replaces the company’s existing agreement, which is scheduled to expire in April 2012.

As per the terms of the new contract, the tech major is expected to deliver IT services, including service desk, collaborative services, end user compute, mainframe, physical/virtual servers, storage and networking, service request fulfillment, as well as project services and application maintenance and support.

The company has a long-term relationship with BAE, spanning a period of 10 years. This new deal is a continuation of the long-term contract, under which CSC will provide IT systems and support to 11 BAE Systems operations across100 locations in the U.K., Saudi Arabia and Sweden.

The latest deal extends the company’s recent deal winning spree. In September this year, CSC won a 10-year contract worth more than $900.0 million from a U.S-based global multi-brand commercial products manufacturer, which offers information technology and infrastructure managed services. So, it is safe to say that CSC has a major pipeline of deals, which will supplement its revenue stream going forward.

On the other hand, there are certain issues that make us a bit apprehensive about the company. The retirement of the company’s CEO comes at a crucial time when CSC is facing three major issues, namely the NHS contract, SEC investigation and a tough government spending environment. Moreover, the investors are seeking a positive resolution of the prevailing issues and are also keen to know the company’s stance in order to get involved in the stock.

Moreover, lower contribution from the NHS contract (which forms a substantial part of its revenues) may affect results over the next few quarters.

The company reported modest second quarter 2012 results, with revenue remaining almost flat year over year. However, we are apprehensive about the intense competition in the IT and cloud computing space from larger players such as Accenture plc (ACN - Snapshot Report) and Hewlett-Packard Company (HPQ - Analyst Report).

This apart, government orders are expected to dry up to a certain extent and the NHS (National Health Services) business to slow down, so things look difficult for CSC. 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.

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