Norwegian oil major Statoil ASA (STO) is considering the divestment of its stake in West Qurna Phase-2 field to Russian giant Lukoil.

The massive West Qurna field in southern Iraq is divided into two phases. West Qurna Phase-1 is being developed by ExxonMobil Corporation (XOM) and Royal Dutch Shell (RDS.A).

The gigantic Phase-2 oilfield is estimated to hold approximately 12.9 billion barrels of oil. Statoil and Lukoil had inked a 20-year field development contract in December 2009, with an aim to raise output to 1.8 million barrels per day within a period of six years. Per the deal, Statoil has the right to divest its stake to another company after receiving consent from the oil ministry.

Statoil, Lukoil and Iraq’s North Oil Company are partners in the West Qurna Phase-2 field with stakes of 18.75%, 56.25% and 25%, respectively. Statoil is looking to dispose its stake in the field because of rising social insecurity amid escalating political tension.

Statoil has for long been contemplating abandoning operations in Iraq. The company wants to focus on less risky areas and is planning substantial investments in areas such as offshore Norway and in the United States.

Statoil has received approval from the Iraqi oil ministry with respect to selling its stake to Lukoil and the deal is in its final stages, per market sources.

Over the last few quarters, Statoil has been divesting low-profit generating assets, in particular the ones that do not fit its long-term growth plan, and collaborating on lucrative deals in an attempt to streamline its operations. Accordingly, this divestiture deal is reflective of the company’s long-term outlook.

Statoil holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. For the long term, we maintain a Neutral recommendation on the stock.

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Dun & Bradstreet Corp. (DNB) is scheduled to release its fiscal fourth quarter results on February 6, 2011 after the closing bell. We do not notice any changes in analyst estimates ahead of the earnings release.

However, the company has exceeded the Zacks Consensus Estimates in the past four quarters, averaging a positive earnings surprise of 4.0%. Thus, another positive earnings surprise is expected from the company for the fourth quarter.

Recap of 3Q11

In the third quarter of 2011, the company surpassed the Zacks Consensus Estimate on both the top line and bottom line, boosted by higher core revenue (Risk Management Solutions, Sales & Marketing Solutions and Internet Solutions revenue) and favorable foreign exchange rates.

In the third quarter, operating expenses increased 2.2% year over year to $150.2 million. Selling and administrative expenses were up 3.2% year over year to $162.6 million. Net income before non-core gains and one-time charges was $70.0 million, up 15.0% year over year, with net margin expanding 70 basis points (bps) to 15.9%.

Expectations from 4Q11 and FY11

For the fourth quarter, management expects continued top-line growth from the North American region.

For fiscal 2011, D&B expects core revenues to increase 5.0% to 8.0%, before the effect of foreign exchange. Operating income is expected to increase 2.0% to 6.0%, before non-core gains and charges.

The company expects earnings to grow in the 6.0% to 10.0% range, before non-core gains and charges. D&B expects free cash flow (excluding the impact of legacy tax matters but including the new Strategic Technology Investment) to be between $240 million and $270 million.

Estimate Revision Trend

In the last thirty days, none of the seven analysts covering the stock have made any changes in their estimates, and as a result the Zacks Consensus Estimate for the fourth quarter remained at $2.09 per share.

For fiscal 2011, the Zacks Consensus Estimate is pegged at $6.14 per share.

Analysts covering the stock expect the company to be positively impacted by the company’s strong product portfolio that is expected to drive the top-line going forward. Additionally, the wind down of $130 million of strategic technology investment is expected to save costs in 2012 and beyond.

Recommendation

We believe D&B’s high-margin business model, international growth potential, emerging market growth, strategic investments, incremental cost savings, new product pipeline and impressive cash flow to drive its long-term growth.

However, a sluggish macro-economic environment in North America and weakness in Europe combined with integration related risks and foreign exchange headwinds remain concerns. Moreover, increasing competition from companies including Equifax Inc. (EFX) and Moody’s Corp. (MCO) may hurt its profitability going forward.

We maintain our Neutral recommendation on a long-term basis (6-12 months). Currently, D&B has a Zacks #3 Rank, which implies a Hold rating over the short term (1-3 months).

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Medical devices major St. Jude Medical’s (STJ) fourth-quarter 2011 adjusted earnings per share of 86 cents beat the Zacks Consensus Estimate by a couple of cents and exceeded the year-ago earnings of 75 cents.

Highlights from the Quarter

Profit (as reported) for the fourth quarter slipped roughly 21% year over year to $163.4 million (or 51 cents a share) as higher sales were overshadowed by lofty special charges.

Revenues rose 4% year over year to $1,406.9 million, beating the Zacks Consensus Estimate of $1,400 million. Double-digit growth across the company’s Atrial Fibrillation, Cardiovascular and Neuromodulation segments was partly masked by the decline in the core Cardiac Rhythm Management (“CRM”) division.

Revenues from the CRM division fell 4% year over year, indicating sustained softness in the U.S. ICD market. ICD revenues clipped 5% and pacemaker sales declined 4% in the quarter.

Atrial Fibrillation and Neuromodulation businesses posted healthy growth in quarter with revenues surging 13% and 12% year over year, respectively. Revenues from the cardiovascular franchise climbed 18%, backed by the contributions of AGA Medical.

We have discussed the quarterly results at length here: St. Jude Beats, Charges Hurt Net.

Agreement – Estimate Revisions

Estimates for St. Jude are on downswing following the fourth quarter results. Out of 22 analysts covering the stock, 2 have lowered their estimates for fiscal 2012 over the past week with none raising their forecasts. Over the past month, 18 analysts have truncated their forecasts for the year with 3 moving in the opposite direction.

Estimates for the first quarter elicit somewhat similar trend with 4 (out of 18 analysts) having chopped their estimates over the past 7 days with no reverse movements. There were 11 downward revisions over the past month coupled with a solitary opposite movement. The bearish sentiment reflects the impact of an unfavorable foreign exchange environment on earnings in 2012.  

Magnitude – Consensus Estimate Trend

There has been an increase of a penny in the estimate for fiscal 2012 over the past week. However, given a plethora of downward revisions, estimate for the year have fallen by a 7 cents over the past month. For the first quarter, estimate (of 83 cents) remained stationary over the last 7 days while declining by 2 cents over the past 30 days.

Neutral on St. Jude

St. Jude is consistently producing revenue growth and positive earnings surprises over the past several quarters. We are impressed by its solid fundamentals, healthy growth trajectory, strong product mix, robust pipeline and cost management initiatives. A spate of new growth drivers (including new products and emerging markets) are expected to offer opportunities for accelerated sales growth in 2012 and beyond.

St. Jude is poised for incremental opportunities in CRM on the back of strong product momentum, despite soft market conditions. The company’s Fortify and Unify devices are gaining notable traction and increased penetration of these products should enable it to expand its position in CRM.

St. Jude achieved a major milestone during the fourth quarter as it secured the U.S. approval for its much-awaited Unify Quadra cardiac resynchronization therapy defibrillator (“CRT-D”), the industry's first quadripolar pacing system. St. Jude is currently the only company to offer this technology globally.

Unify Quadra, which is also approved in Europe, is expected to help the company win ground in the highly competitive U.S. defibrillator space in 2012. St. Jude is also expected to benefit from favorable replacement cycle and a new distributor in Japan.

Moreover, the company’s strategic investment in cardiac devices maker CardioMEMS represents another significant opportunity to boost its technologies focused on improving heart failure management.

In Atrial Fibrillation, new irrigated ablation catheters for treating cardiac arrhythmias should help St. Jude sustain the healthy growth in 2012. Growth in St. Jude’s Neuromodulation business will be fostered by the expanded adoption of deep brain stimulation (“DBS”) systems.

Moreover, U.S. approval of the DBS system in Parkinson’s disease (expected in 2013) represents another promising prospect. St. Jude’s DBS business is poised for a robust growth in 2012, in part, driven by the impressive results from the first controlled study of its DBS systems (Libra and LibraXP) for Parkinson’s disease, which was recently published in The Lancet Neurology journal.

On the Cardiovascular front, emerging opportunities across a slew of fast-growing therapy areas such as transcatheter aortic valve implant (“TAVI”), percutaneous mitral valve repair (“PMVR”), left atrial appendage (“LAA”) and renal denervation should set the stage for growth in the years ahead.

Among the emerging opportunities, St. Jude is optimistic to enter the European TAVI market with its Portico valve before end-2012. Moreover, the company is expected to launch the PMVR technology in Europe before end-2013 and its renal denervation catheter by end-2012.

However, St. Jude and its peers Medtronic (MDT) and Boston Scientific (BSX) are contending in a soft CRM market. According to the company, the worldwide CRM market contracted 4% in constant currency in 2011, thereby impacting its CRM sales. The company expects the global CRM market to decline at a low single-digit bracket (in constant currency) in 2012.

Moreover, pressure on the company’s ICD business has been exacerbated by the Riata defibrillator lead (a thin wire) issue. The FDA issued, in late 2011, an urgent recall of these leads given the potential risk of serious injury or patient death.

We are also cautious about the dilutive impact of acquisitions and foreign exchange headwinds. We currently have a long-term Neutral recommendation on St. Jude. The stock currently retains a short-term Zacks #4 Rank (Sell).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.

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Aesthetic products company Syneron Medical (ELOS) has commenced the launch of its new skin remodeling procedure. The treatment procedure dubbed “evolastin” is the first energy-based dermal remodeling procedure which delivers controlled radio frequency energy directly to the deep dermal layer to stimulate its natural production of collagen, elastin and hyaluronic acid in one treatment.

Collagen is a naturally occurring protein which keeps skin healthy while Elastin (a complimentary protein to collagen) helps to maintain skin flexibility. Hyaluronic acid moisturizes skin and reduces wrinkles.

Unlike the conventional energy-based therapy procedures which reach the deep layer of the skin (or dermis) through surface, evolastin places the entire energy directly at the base of the dermis using insulated microneedles, thereby creating a unique wound healing response. 

The procedure is generally performed under local anesthetic and takes roughly an hour, enabling patients to go home safely following treatment and return to normal activities within a day. Results from a recently published study by leading dermatologists demonstrated the unique benefits of evolastin for patients looking for an alternative to address the loss of tautness and elasticity of skin most common with age.

Syneron offers a comprehensive product portfolio and a global distribution setup. Its knowledge allows medical practitioners to provide sophisticated solutions for a wide range such as wrinkle reduction, hair removal and body contouring. The company faces some competition from Cutera (CUTR) among others.

Syneron’s product line-up includes items for skincare for both the home-use and professional segments. The company markets and supports its products in about 86 nations.

Syneron’s revenues for third-quarter fiscal 2011 surged 28% year over year to $57 million, fueled by robust sales from its Emerging Business Units (“EBU”) segment. Revenues from the EBU unit increased nearly six-fold year over year in the quarter. Sales from its core Aesthetic Devices division climbed 19%.

However, the company’s losses widened to $40.1 million (or $1.14 a share) in the quarter from $5.2 million (or 15 cents a share) a year ago, hurt by costs associated with legal settlement with Palomar Medical (PMTI). Syneron is scheduled to report its fourth quarter results on February 9.

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Jacobs Engineering Group Inc. (JEC) announced to have received a design and engineering support program (DESP) III prime contract from the Air Force Materiel Command (AFMC) Contracting Directorate.

Since 2005, Jacobs has provided program management, systems and specialty engineering, logistics support and research and development under DESP II contract. As per the new contract, Jacobs will now be providing engineering services to support AFMC weapon systems, components and support equipment.

Further, the contract is anticipated to strengthen the company’s longstanding relationship with the Air Force customers, thereby offering ongoing support to the AFMC mission.

The potential value of this multiple-award indefinite delivery/indefinite quantity (IDIQ) contract is estimated around $1.9 billion over the seven-year period of performance.

Jacobs has been winning strategic contracts from federal governments and other clientele, diversified across services and geographies. Such continuous contract inflow appears favorable for Jacobs in order to maintain a significant market share in the huge global infrastructure market.

The company’s growing international exposure and diversification across markets, geographies and services have given it a competitive edge over its peers, viz. Fluor Corporation (FLR) and Foster Wheeler AG (FWLT).

The company reported its financial results for the first quarter of 2012 with total revenue of $2,631.8 million, up 11.7% year over year. The results were based on solid operational performance on the backdrop of improving markets. We believe that the company’s steady backlog, strategy of better labor utilization alongside improved pricing and a mix shift will accelerate operational efficiencies while raising the company’s future earnings

Jacobs Engineering Group, one of the world's largest and most diverse providers of technical, professional, and construction services, serves a variety of industrial, commercial and government clients across a global network. We currently hold a Neutral recommendation on the stock. Jacobs has a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating.

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One of the leading global specialty retailers, Gap Inc. (GAP), continues to record comparable store sales results in the red. Last January, Gap registered a decline of 4% in same-store sales for the four-week period ended January 28, 2012, with sales declining across the board. The year-over-year comparison also looked jaded with the company recording a growth of 3% in the prior-year comparable period.

January 2012 Sales

Gap witnessed a contraction in same-store sales across each of its segments, except Banana Republic North America. Gap North America’s same-store sales declined 5% versus 2% rise in the prior-year period.

The company’s same-store sales in the international region plunged 10% compared with an increase of 9% in the year-ago period. Same-store sales at Old Navy North America fell 6% compared with flat last year. However, the company reported growth of 6% in Banana Republic North America segment compared with a positive 2% growth in the prior-year period.

Net sales for the four-week period ended January 28, 2012 inched down 1% to $833 million compared with net sales of $843 million in the prior-year period, primarily driven by sluggish performances across all of the company’s businesses.

Fourth-Quarter 2011 Sales

During fourth-quarter 2011, the company’s comparable sales declined 4% compared with an increase of 1% in the prior-year quarter. Consequently, Gap’s net sales during the quarter inched down 2% to $4.28 billion compared with $4.36 billion in the previous-year quarter.

The company has reported negative comparable sales result in all the four quarters of fiscal 2011. However, despite declining comparable sales result, the company is expecting earnings in the range of 41 – 42 cents per share, well above the Zacks Consensus Estimate of 35 cents.

Fiscal 2011 Sales

In fiscal 2011, Gap has reported a decline in comparable sales every month, except April and June. During the fiscal, the company has reported a decline of 4% in comparable sales compared with an increase of 2% during the same period in fiscal 2010. Accordingly, Gap’s net sales dropped 1% to $14.55 billion from the prior-year sales of $14.66 billion.

Why Negative Comps?

The company faced a number of challenges during the busiest shopping season of the year. Lackluster sales in North American region have continuously dragged down Gap’s comparable store sales throughout fiscal 2011.

Moreover, the holiday season did not help the company to inflate its sales figures in December 2011. However, the company is taking strategic steps to counter the domestic market saturation.

Gap is losing its market share against its rivals, The TJX Companies Inc. (TJX) and Macy’s Inc. (M), who registered same-store sales growth of 7% and 2.4%, respectively, for the four-week period ended January 28, 2012. Both these companies successfully lured the shoppers with their aggressive promotional activities.

Negative Comps Dragging Profit Down

During the last three quarters of fiscal 2011, the company’s declining comparable sales have negatively impacted its quarterly performance. Comparable sales in the first quarter declined 3%, resulting in a drop of approximately 11% in earnings per share.

During the second quarter, Gap’s earnings per share plummeted approximately 3%, primarily due to a decline of 2% in comparable sales. The third quarter was also not a happy tale for the company, as its comparable sales fell by 5%, dragging earnings per share down by 21%.

Initiatives Taken

In an effort to improve customer experience and enhance productivity per square footage, the company intends to strategically close and consolidate square footage at Gap and Old Navy brands. Gap intends to strategically reduce its Gap North America store counts to 950 by the end of fiscal 2013, consisting 700 specialty stores and approximately 250 outlets.

Contrary to this, the company is planning aggressively to expand its international and franchise business. The company intends to triple the Gap store count in China from 15 to approximately 45 during the next 12 month period.

Moreover, in a drive to boost its international operations, Gap consolidated its foreign business under one division in London. Lackluster sales in North America compelled the company to explore the overseas market.

In order to counter the domestic market saturation, Gap is aiming to generate 30% of total sales from the overseas operations and online business by 2013. To achieve this end, Gap has opened stores in China, Italy and Australia, and has launched the e-commerce business in more than 90 markets, which are expected to further strengthen its top and bottom lines, moving forward.

Conclusion

We believe that the company’s long-term strategic moves along with disciplined cost management measures will not only provide financial flexibility, but will also help to drive value proposition. Moreover, Gap’s globally recognized brands complement one another, enabling it to leverage its position in the sector.

Currently, Gap’s shares maintain a Zacks #3 Rank, which translates into a short-term Hold rating. Our long-term recommendation on the stock remains Neutral.

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Natural Resource Partners (NRP) has announced its fifth coal reserve acquisition at the Deer Run mine near Hillsboro, Illinois. With the five acquisitions, the partnership has acquired around 200 million tons of coal reserves at Deer Run mine near Hillsboro, Illinois from Colt LLC, an affiliate of the Cline Group.

This fifth transaction, valued at $40 million, would be funded with cash. This would take the cumulative value of the transactions to $255 million. The company will pay the amount to Colt LLC only after the completion of the first pass of the longwall, scheduled in August 2012.

The partnership benefited significantly from its Illinois Basin operations. In the third quarter 2011, total coal production increased by 10.0% to 13.6 million tons, driven by 49.6% production increase in Illinois Basin. The coal royalty revenue contributed by Illinois Basin was $15.8 million in third quarter 2011 versus $9.3 million in the year-ago quarter. This spiked the partnership’s coal royalty revenue by 27.0% to $76.4 million year over year.

As of September 30, 2011, Natural Resource had cash and cash equivalents of $150.1 million versus $95.5 million in the year-ago period. The partnership also completed a private placement of senior notes in early October 2011 for $50.0 million, which were used to finance a portion of its Hillsboro acquisitions. It had $300 million in available capacity under its credit facility.

In the third quarter of 2011, Natural Resource invested $8.2 million for acquisitions of coal reserves in Pennsylvania and Illinois. All payments in the third quarter were funded with the surplus cash balance from the 2011 private placements.

Natural Resource is slated to release its fourth quarterly numbers on February 6, 2012. The Zacks Consensus Estimates for the fourth quarter 2011 and fiscal year 2011 are currently at 47 cents per share and $1.95 per share, respectively.

Natural Resource Partners currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. The company competes with Peabody Energy Corporation (BTU) and CONSOL Energy Inc. (CNX).

Based in Houston, Texas, Natural Resource Partners, a master limited partnership (MLP), principally engages in the business of owning and managing mineral reserve properties. The partnership mainly owns coal, aggregate and oil and gas reserves across the United States.

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Following the release of fourth quarter and full year 2011 results, most of the analysts covering Johnson & Johnson (JNJ) have reduced their earnings estimates for 2012 and 2013. The revisions in estimates mainly reflect the guidance provided by the company.

Fourth Quarter and Full Year 2011 Recap

Johnson & Johnson posted fourth quarter 2011 earnings (excluding special items) of $1.13 per share, three cents above the Zacks Consensus Estimate of $1.10 and 9.7% above the year-ago earnings of $1.03..

Johnson & Johnson’s revenues for the fourth quarter increased 3.9% year-over-year to $16.3 billion. Revenues were in-line with the Zacks Consensus Estimate.

Full year 2011 earnings came in at $5.00, 5% above the year-ago earnings of $4.76 per share and 4 cents above the Zacks Consensus Estimate. Earnings came in at the top end of the company's guidance of $4.95 - $5.00 per share.

Meanwhile, revenues came in at $65 billion, up 5.6% from the year-ago period and in-line with the Zacks Consensus Estimate and the company’s guidance. (Read our detailed earnings report at: J&J Beats, 2012 Outlook Disappoints).

Agreement of Analysts

Estimates for 2012 indicate a significant negative bias. All 22 analysts covering the stock have cut their estimates for 2012 following the release of fourth quarter results.

Estimates are down for 2013 as well. 11 of the 19 analysts covering the stock have lowered their 2013 estimates in the last 30 days with only 1 analyst moving in the opposite direction. Over the last 7 days, 2 analysts have lowered their estimates with no movements in the opposite direction.

The downward revision in estimates reflects Johnson & Johnson’s disappointing outlook for 2012. The company expects earnings of $5.05 to $5.15 per share, reflecting 3.5% -5.5% operational growth. Currency fluctuations are expected to have a negative impact of about 2.5%. 2012 earnings guidance was well below expectations.

Moreover, the company expects to continue incurring significant costs in 2012 (higher than 2011) as it works on addressing its manufacturing issues and bringing back its McNeil Consumer Healthcare products to the market.

Meanwhile, pricing pressure is expected to continue in 2012. The company expects pricing pressure to negatively impact pretax operating margin by 0.5% - 1% in 2012.

Year-over-year revenue comparisons will also be tough in the first half of 2012 as Levaquin and Concerta started facing generic competition from mid 2011.

Magnitude – Consensus Estimate Trend

The significant downward bias has resulted in 2012 earnings estimates being trimmed by 11 cents to $5.11 in the last 30 days. Meanwhile, 2013 estimates have gone down by 16 cents to $5.44 per share in the last 30 days.

Neutral on Johnson & Johnson

We currently have a Neutral recommendation on Johnson & Johnson. The stock carries a Zacks #4 Rank (Sell rating) in the short run. We expect the stock to remain under pressure in the near term given the below-consensus guidance provided by the company.

Our long-term Neutral recommendation on the stock is based on the belief that Johnson and Johnson’s diversified business model, lack of cyclicality and strong financial position will help it in tough situations. Moreover, Johnson & Johnson has been signing deals, which should help boost its revenues in the long term.

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Specialty pharmacy services provider, BioScrip Inc. (BIOS) recently announced its decision to dispense with certain community specialty pharmacies and mail service pharmacy business assets to leading drugstore retailer Walgreen Corp. (WAG) for $225 million.

Walgreen's will initially pay $170 million in cash at the closing of the deal, expected in late April 2012. BioScrip will also retain certain accounts receivable and working capital liabilities of $55 million based on its balance sheet at December 31, 2011.

Moreover, BioScrip may also gain an additional $60 million from Walgreen's depending on whether Walgreen's retains certain business included in the transferred businesses. Revenues from the transferred business for the nine-months ending September 30, 2011 were $938.5 million with gross profit of $73.7 million (7.9% of sales).

While BioScrip expects this transaction to be accretive to its earnings in 2012, Walgreen's anticipates the transaction to have no material impact on its earnings in fiscal 2012. However, the transaction will be moderately accretive in fiscal 2013.

Following the announcement of the deal, BioScrip's shares shot up 15.07% to $6.72 on Thursday while Walgreen's stock rose 1% to $33.53.

Walgreen's believes that the acquisition is a strategic fit and will strengthen its pharmacy services business. With this transaction, Walgreen's will get hold of BioScrip’s community specialty pharmacy business in 30 locations across 16 states in the US and the District of Columbia, primarily serving HIV, oncology and transplant patients.

In addition to that, Walgreen's will also gain some assets of BioScrip's centralized specialty pharmacy business and traditional mail service pharmacy business that dispenses prescriptions for drugstore.com (acquired by Walgreen's in June 2011).

On the financial front, as per the last reported quarter, BioScrip had a highly leveraged balance sheet. Despite lowering its debt by $27.5 million during the quarter, BioScrip had $278.9 million in total long-term debt, much higher than $206.4 million in stockholders’ equity.

BioScrip believes that this transaction will also help the company emphasize more on areas with long-term growth potentials and high returns. The company plans to deploy corporate resources more on Infusion/Home Health industry where it has meaningful strengths and competitive advantages.

With favorable demographic trends, including an aging population in the US, the company is very much optimistic about the future growth prospect of the home health industry. According to the estimates of the National Home Infusion Association (NHIA), alternate-site infusion therapy sector currently represents $9–$11 billion per year in US health care expenditures.

BioScrip presently retains a short-term Zacks #1 Rank (Strong Buy). Walgreen's, on other hand, maintains a short-term Zacks #3 Rank (Hold).

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Computer Sciences Corporation (CSC) is scheduled to announce its third quarter 2012 results on February 8, 2012, and we witness a negative bias in the analysts’ estimates.

Second Quarter Recap

The company reported modest second quarter 2012 results with earnings per share (EPS) of 94 cents, comprehensively beating the Zacks Consensus Estimate of 68 cents. The company’s second quarter 2012 revenues inched up 0.79% year over year to $3.97 billion.  

The company witnessed year-over-year revenue growth in the Business Solutions & Services (BSS) and the Managed Service Sector (MSS) segments. Within the commercial segment, strong revenue growth in the BSS segment was somewhat mitigated by the weak MSS performance.

Across the three lines of business, new business awards in the reported quarter were $6.6 billion. North American Public Sector (NPS) contributed $3.1 billion, MSS registered $2.6 billion, and Business Solutions & Services closed $0.9 billion of new business.

CSC posted an operating loss margin of 1.89%, deteriorating considerably from the operating profit margin of 7.75% in the year-ago quarter. The margin was negatively impacted by higher cost of services and a significant goodwill impairment charge during the quarter.

The company exited the quarter with $978.0 million in cash and cash equivalents, down from $1.67 billion reported in the previous quarter. CSC had a total debt balance of $3.26 billion with a debt-to-capitalization ratio of 40.8%.

While guiding for fiscal 2012, the company included the contribution from the iSoft acquisition. CSC expects new business awards in excess of $17 billion; revenues of approximately $16.5-$16.7 billion; operating margin of 6.00% and EPS of approximately $4.05-$4.10. Free cash flow is expected to be equal to or greater than 90% of net income for the year.

Agreement of Analysts

Out of the 12 analysts providing estimates for the third quarter, only one analyst lowered the estimate over the last 30 days. Out of the 10 analysts covering the stock for fiscal 2012, one analyst lowered the estimate in the last 30 days, while none moved in the opposite direction. Similarly, for fiscal 2013, out of the 13 analysts tracking the stock, three analysts lowered their estimates in the last 30 days, while none moved in the opposite direction.

The company has recently resumed discussions with NHS and Cabinet officials regarding the memorandum of understanding (MOU), which included proposed re-negotiated terms of the contract. However, the company later on informed that neither the MOU nor the most recently discussed contract amendment would be approved by the UK government.

As a result of this new development, CSC would have to realize a material impairment in the third quarter of 2012 on its net investment in the contract. This impairment could be equal to CSC's net investment for the contract ($1.5B as of Nov. 30, 2011) and may also include some other costs, leading CSC to lower its previously provided fiscal year 2012 guidance.

Analysts are also of the opinion that issues other than the NHS contract may pose a considerable challenge to CSC. These include the Audit Committee investigation into CSC's accounting practices initiated in May 2011, which will lead to significant legal and accounting costs.

Secondly, the company is also entangled with a class action lawsuit by multiple shareholders who allege violations of securities laws in connection with business representation. A decision on the same issue is pending, and may result in potential losses if it goes against the company.

Magnitude of Estimate Revisions

The magnitude of revisions is also substantial since CSC reported its second quarter results. Overall, estimates for the upcoming quarter have gone down from $1.17 to 57 cents in the last 90 days.

For fiscal 2012, estimates have decreased to $3.68 from $4.30 in the last 90 days. Moreover, for fiscal 2013, the estimates have gone down from $4.62 to $3.71 over the same period.

Recommendation

We are apprehensive about the intense competition in the IT and cloud computing space from both big and small players such as Accenture (ACN) and Hewlett-Packard Company (HPQ). Moreover, with government orders expected to dry up to a certain extent and the NHS problem persisting, lingering legal issues are also making it difficult for Computer Sciences.

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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