Earnings Preview: Computer Sciences - Analyst Blog

Computer Sciences Corporation (CSC) is scheduled to announce its second quarter fiscal 2011 results on November 10, 2010, and we do not see substantial variation in analyst estimates at this point.

First Quarter Overview

The company reported decent first quarter 2011 numbers, with earnings per share (EPS) of $0.91 exceeding the Zacks Consensus Estimate of $0.90, although earnings declined from the year-ago quarter. Computer Sciences generated revenues of $3.94 billion, up 1.1% from the year-ago quarter, driven by strength across all segments except Business Solutions & Services.

The company won $3.2 billion worth of new business awards in the first quarter. Of the three lines of business, North American Public Sector, Business Solutions and Services, and the Managed Services Sector accounted for $1.2 billion, $0.8 billion and $1.2 billion, respectively, of new business wins.

Computer Sciences recorded an operating margin of 7.13%, down 32 basis points from 6.81% reported in the year-ago quarter. The margin was negatively affected by the increase in cost of services, offset to a considerable extent by the increase in revenue.

Moreover, Computer Sciences is cash rich and exited the quarter with cash and cash equivalents of $2.43 billion. The company's debt-to-capitalization ratio also improved 30 basis points year over year to 36.8%.

The company provided its guidance for full fiscal 2011. Accordingly, Computer Sciences expects new business awards in excess of $18 billion, revenue in the range of $16.8 to $17.2 billion, operating margin of between 9% and 9.25% and EPS of $5.30– $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 second quarter, none of the analysts have made any revision in the last thirty days. Out of the fourteen analysts tracking the stock for fiscal year 2011, only one analyst has revised the estimate downward in the last thirty days, while no analyst has 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, the analysts are sticking to the estimates projected post fourth quarter earnings. 

Some analysts are of the opinion that the company's U.S. federal business may come under some pressure. The business constitutes around 40% of CSC's total revenue. Revenues from this segment may be impacted by tighter U.S. government budgets, which could limit expenditure on technology and instead channel the funds into defense.

On the other hand, some analysts are positive about the company's win at the U.K.'s National Health Services that is expected to generate recurring revenue for CSC in the upcoming quarters. Some analysts are also bullish about the healthy bookings growth, and consider it to be resilient.

Magnitude of Estimate Revisions

The magnitude of revisions is also minimal, since CSC reported its first quarter results. Overall, estimates for the quarter to be reported have gone down from $1.19, 90 days ago to $1.17 (current), with no changes in the Zacks Consensus Estimate over the past 30 days. For fiscal year 2011, estimates have remained flat at $5.30, over a 90-day period. Estimates have not changed over the past 30 days.

Recommendation

We are optimistic about the company's outlook for fiscal 2011, its enhanced product portfolio, growing customer base and the revival in the macroeconomic scenario.

On the other hand, we are a bit concerned about the intense competition in the IT and cloud computing space from players such as Accenture (ACN) and Hewlett-Packard Company (HPQ). Moreover, demand from the company's European customers may not be encouraging in the upcoming quarters.

The company has a short-term Zacks #3 Rank (Hold rating).