Computer Sciences Positive on Restructuring; Risks Remain - Analyst Blog

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On Sep 11, 2014, we issued an updated research report on Computer Sciences Corp. ( CSC ).

The company, one of the prominent IT service providers worldwide, has undertaken a turnaround strategy, part of which involves rationalization of the cost structure. Not only is it taking measures to rightsize its workforce, but also focusing on increasing efficiencies in the supply chain and procurement process. Leveraging these initiatives, the company saved approximately $570 million in fiscal 2014, exceeding its guided range of $500 to $550 million. The company has set $450 to $500 million cost optimization target for fiscal 2015 backed by efficient supply chain management and shift to lower cost delivery centers.

Moreover, the company is reinvesting these savings in strategic areas to propel growth. Computer Sciences reinvested $315 million in fiscal 2014 in keeping with its target of $300 to $325 million investment. For fiscal 2015, Computer Sciences expects to reinvest $350 to $400 million (up from fiscal 2014) in human resource, financial systems, customers-related savings and development of new and innovative cloud-based services. Given the fact that revenue growth initiatives may take some time to gain momentum, these cost-cutting actions will go a long way toward EPS growth.

Also, the company's focus on the cyber business, cloud computing market and Big Data business remain the catalysts, going forward. A significant portion of Computer Sciences' cyber business is contributed by the federal government and, to an extent, the commercial sector. The company mainly focuses on providing backup IT support to federal government departments and some other companies.

Computer Sciences is also focusing on strategic partnerships to expand its share in the cloud computing market. For instance, the strategic partnership with AT&T ( T ) where Computer Sciences' cloud business infrastructure will be merged with AT&T's cloud infrastructure. Computer Sciences will also help AT&T and its customers update application products. HCL had joined forces with the company to expand its core banking and card services solutions. The company has also entered into a partnership with Amazon ( AMZN ) to develop cloud-based solutions for enterprise and public sector clients. Computer Sciences has also signed a cloud partnership agreement with International Business Machines ( IBM ).

Nonetheless, the IT services market is becoming competitive with companies like CACI International Inc. and Accenture making their presence felt. Delay in the government's order renewal process and constricted federal spending are the near-term headwinds for the company. Moreover, as a substantial portion of Computer Sciences' sales (approximately 41%) is derived from outside the U.S., currency fluctuation risks cannot be ignored.

Currently, Computer Sciences has a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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