Computer Sciences Corporation (CSC) And Billionaire David Einhorn’s Investor Letter

Why does Einhorn love Computer Sciences Corporation (NYSE:CSC) ? After breaking down why billionaire David Einhorn still loves Marvell Technology, it is time to take a look at another pick that Einhorn has outlined as one of his favorites, Computer Sciences. Greenlight managed to return only 4.9% during the fourth quarter, pushing the hedge fund’s total net return for 2012 down to 7.9% (see the top performing hedge funds), but he’s betting on Computer Sciences to turn that around in 2013. Einhorn had this to say about his bet on Computer Sciences…

We believe that CSC has earnings power in excess of $4.00 per share and the new management team is capable of turning the company around to achieve those earnings, and possibly more.

Analysts expect Computer Sciences to post EPS for fiscal year 2013 (ending in March) of $2.40, then $3.36 in 2014. Einhorn’s belief that the company can generate over $4 in earnings per share may sound over the top, but it is not that far-fetched (see what Einhorn’s newest picks were). The last three quarters have been unusually poor for Computer Sciences, but solid quarterly earnings performance is possible, as seen from its past:

The big dips of late have been related to restructuring charges and expired Department of Defense contracts. However, the company believes it will be able to save $1 billion over the next 18 months thanks to restructuring. Einhorn has been adding to his Computer Sciences’ position over the past few quarters, betting on this restructuring. Einhorn and Greenlight first took a position in Computer Sciences during 1Q 2012, and upped his stake 50% during 2Q 2012, then another 90% in 3Q 2012 (check all the stocks Einhorn owns).

Computer Sciences is one of the largest IT consulting firms in the world and was recently selected as a key contractor for the Dept. of Homeland Security. The beauty of the government contracts that Compute Sciences are able to secure is that they provide stability to cash flow generation, given the length of the contract and relative soundness of the government. Einhorn’s investment thesis relates to the fact that Computer Sciences is still a fundamentally sound business that has…

…margins well below that of its peers as a result of organizational inefficiencies, historical mismanagement, and various non-recurring charges that obscured underlying earnings. In addition, the company owned several valuable assets, including its high-margin Equifax credit services affiliate that we believed could be monetized at an attractive multiple.