Can things possibly get any worse for Computer Sciences Corp (CSC)? After taking a $1.5bn charge relating to its much maligned contract to introduce electronic patient records into the National Health Service, the shares now trade at near 15-year lows. However, its fortunes could be changing.
In March, the US IT outsourcing giant appointed Mike Lawrie as chief executive. He is an industry veteran, having spent 27 years with IBM, and is already implementing a slew of positive measures following an unacceptable 2011. The first part of his 'boot-camp' plan involves slashing $1bn per year of overheads over the next 18 months, jettisoning non-core assets, implementing stricter contract-negotiation processes and assembling a crack-team of directors.
This restructuring is long overdue and should boost profits. Although its reputation has been severely dented by the NHS fiasco, CSC is definitely not a lost cause.
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The group has strong positions with the US government (36% of sales), in managed services (42%) and in business solutions. And in an environment where clients want to do more for less, its bread-and-butter services of IT integration, outsourcing, software and web hosting, should help them expand their capabilities, increase productivity and reduce costs.
CSC is also making progress in some exciting areas such as cloud computing and cyber-security. In 2011, it negotiated a deal to enable the US authorities to rapidly deploy a range of cyber, managed services and physical security solutions. In June, the firm was also selected as one of the preferred suppliers for a ten-year, $20bn contract for the US National Institutes of Health Information Center.
Under the terms of the agreement, CSC will provide solutions for federal, civilian or Department of Defence agencies to meet their IT needs. These include health and biomedical-related services for scientific, administrative, operational and managerial requirements.
Computer Sciences Corp (NYSE: CSC), rated a BUY by Stifel Nicolaus
Wall Street is predicting a couple of lean years for shareholders until the benefits of Lawrie's initiatives come through. By 2014, though, I believe performance should be back to at least 2010 levels, when the firm hit $16.1bn in sales and delivered $5.24 of earnings per share. I rate the stock on a ten times 2014 EBITA multiple. Discounting back at 12% and adjusting for net debt of $1.6bn and a $1.3bn pension deficit generates a fair value of $37 a share.
In the short term, things could remain tough, especially if the dispute with the NHS drags on. CSC also has to work through 40 smaller legacy contracts just as cut-throat competition from the likes of Accenture, HP and the Indian/European outsourcers is pressuring margins. Then there is the ongoing accounting investigation in its Nordic arm. The US government market will also harden as Congress tightens its budgetary belt.
Even so, I expect the stock to eventually be priced in line with its more highly rated peers. And with good cash flow, CSC could even become a takeover target. Stifel Nicolaus has a price target of $34 per share, and quarterly results are expected around 10 August.
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
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