When Computer Sciences Corporation (NYSE:CSC) reported quarterly earnings, the company beat consensus estimates by $0.29 per share, earning $1.27 per share. Instead of bidding shares higher, investors took profits. One reason is that Computer Sciences touched a 52-week high of around $50 on several occasions. By the middle of May, when shares were bid to the $50 level, it sold off.
Computer Sciences Corporation (NYSE:CSC) is an information technology (IT) and professional services whose bread and butter comes from servicing governments. This gives the company a steady source of revenue. The company is making investments in the growing areas of technology, primarily big data and cloud computing. In fiscal 2013, the company took steps to leverage its competitive advantage in this area, which doubled its revenue from $1.4 billion to more than $4.2 billion. Not only did deferred bookings improve, but Computer Sciences is a hidden gem in cloud computing.
Operationally, Computer Sciences Corporation (NYSE:CSC) removed $900 million in costs. Moving forward, the company expects to reduce operational costs by $30 million to $40 million per quarter. Similar to other companies that want to be more efficient in rewarding high-performing staff, Computer Sciences is unifying its internal SAP solution to manage human resources, procurement, and financing operations. Investors should expect lower costs in these operations. More importantly, a greater ability by Computer Sciences Corporation (NYSE:CSC) to manage its HR will mean it may reward its best sales staff.
Negative Catalysts
Even though earnings were on par with consensus, the company forecast lower sales. More importantly, free cash flow will be forecast to drop to around $500 million, while earnings will be between $3.30 – $3.50 per share for the year. In fiscal 2013, the company generated free cash flow of $764 million, and ended the year with $2.1 billion.
Computer Sciences Corporation (NYSE:CSC) ended its fiscal year with $34.4 billion in order backlogs. Weakness in the North American Public Sector is the culprit for the weaker year. The company expects revenue will drop in the single digits.
To improve its efficiency, Computer Sciences Corporation (NYSE:CSC) plans to reduce costs by $1.3 billion through to 2014, which is better than previously projected. The company had expected savings of between $1 billion – $1.2 billion.
Competitive Analysis
To get an idea of other companies undergoing restructuring, look at Hewlett-Packard Company (NYSE:HPQ). The company is going through a multi-quarter cost-reduction program, and it is paying off for shareholders. Hewlett-Packard Company (NYSE:HPQ) earned $0.87 per share in its quarter, which beat consensus by $0.05. This was achieved despite a revenue miss. For several quarters, Hewlett-Packard Company (NYSE:HPQ) focused on massive cost reductions. HP did this because its printing and PC business was stagnating, enterprise software sales were too small, and staff levels were too high. More specifically, in the last quarter, HP experienced a drop in IT outsourcing revenue by 6%, to $3.7 billion.
Another company investors should look at is Xerox Corporation (NYSE:XRX). Like Computer Sciences, labor is a high-cost area needed for delivering professional services. Xerox Corporation (NYSE:XRX) aims to improve revenue, cash flows, and margins by balancing its labor between domestic and offshore. At Barclays global technology conference, Xerox Corporation (NYSE:XRX) said it was investing labor in research and development, which would help drive down costs in the long run. The net goal for Xerox is to improve margins to below the 10% range.
Share Purchases Raise Shareholder Value
Computer Sciences bought back 4.7 million shares for $228 million in the last quarter, and a total of $305 million (or 6.7 million shares) in shares last fiscal year. The average price of the buyback was $45.47. By comparison, HP bought back $797 million, and has another $8.1 billion remaining in authorized share repurchasing.
Foolish Bottom Line
Computer Sciences is the least followed of the services companies mentioned. The average trading volume is only 1.5 million shares, compared to 9 million and 23 million for Xerox and HP, respectively. All three companies have similar price-to-sales ratios, but Computer Sciences is the smallest of the three by market cap. One negative is that Computer Sciences offers the lowest dividend yield:
| NAME | MKT CAP | AVG VOL | YIELD | PRICE/SALES | EBITDA |
|---|---|---|---|---|---|
| Hewlett-Packard | 46.85B | 23,418,700 | 2.4 | 0.42 | 13.92B |
| Xerox Corp. | 10.95B | 9,198,490 | 2.6 | 0.49 | 3.00B |
| Computer Sciences | 6.50B | 1,518,310 | 1.8 | 0.44 | 2.00B |
Data Source: Yahoo Finance
One risk is that expectations remain high for Computer Sciences, since its forward P/E is relatively higher:
CSC Forward PE Ratio data by YCharts
The sharp drop for Computer Sciences Corporation (NYSE:CSC) gives investors a chance to build up a position in the company. Xerox and HP are both attractive too, given their play as companies in transition. Computer Sciences differs in that its business model is solid, and there is a healthy backlog to cushion any unexpected drop in orders.
The article Buy This Hidden Gem originally appeared on Fool.com and is written by Chris Lau.
Chris Lau has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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