Computer Sciences Corporation
) is scheduled to announce its third quarter 2012 results on
February 8, 2012, and we witness a negative bias in the analysts'
Second Quarter Recap
The company reported modest second quarter 2012 results with
earnings per share (
) 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
) segments. Within the commercial segment, strong revenue growth in
the BSS segment was somewhat mitigated by the weak MSS
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
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
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
The company has recently resumed discussions with NHS and
Cabinet officials regarding the memorandum of understanding (
), 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
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
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
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.
We are apprehensive about the intense competition in the IT and
cloud computing space from both big and small players such as
). 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
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