Defense Contracts Play Role In CSC’s Rising Share Price
Corporate Focus
by Anthony Palazzo
Computer Sciences Corp. is one of the region’s largest public companies, but it’s also one of the least well known. The company’s back-room role may explain its anonymity; setting up and running other organizations’ computer networks is not an attention-grabbing occupation.
Yet with a market capitalization of nearly $9 billion, Computer Sciences is L.A.’s seventh most-valuable company. It competes with larger rivals like IBM Global Services and Electronic Data Systems on mega-contracts that routinely top $1 billion in value.
Quietly, El Segundo-based Computer Sciences has turned in the best stock market performance among any of L.A.’s elite companies in recent months. Since Sept. 11, its stock has risen 54 percent, to a recent price of $51.53 a share. The move represents an increase of about $3.1 billion in Computer Sciences’ market value.
Some of its recent success can be attributed directly to the attacks themselves. All the talk about the federal government ramping up homeland security spending, along with anticipated Defense Department expenditures, have played well for the company, said David Grossman, an analyst with Thomas Weisel Partners.
“These guys are a legacy player in the federal government (arena),” he said.
Computer Sciences gets about 25 percent of its revenues from federal government contracts, including 16 percent from the Defense Department, Grossman said. Federal contracts used to make up a much larger portion of revenues, but through more than 70 acquisitions in the past decade and a half, the company’s commercial business has accounted for a greater share.
Nevertheless, much of the excitement of late has come from the federal side, where revenues rose 14 percent to $737.5 million in the third quarter ended Dec. 28. (Overall revenues rose 8.9 percent to $2.9 billion, while net income rose to $87.1 million, or 51 cents a diluted share, vs. $65.6 million, or 38 cents a share, in the like year-earlier period.)
The potential of the government market is undisputed. While private companies have modernized or even outsourced their computer systems to be run by companies like Computer Sciences, governments have moved more slowly. Public agencies are saddled with outdated equipment and an aging, underpaid information technology workforce. Funds are scarce, change is slow, and reluctance on the part of government IT workers, who typically switch over to the contractor’s payroll in such deals, is another hurdle.
There has been progress. Computer Sciences is pursuing $21 billion of federal contracts that will be awarded within the next 26 months. Last summer, Computer Sciences won a 10-year, $2 billion outsourcing contract with the National Security Agency, absorbing 750 NSA workers. The Groundbreaker contract could be worth up to $5 billion if it is expanded, a Computer Sciences spokesman said. While the NSA deal is expected to soften resistance to further government outsourcing deals, it isn’t going to open any floodgates. Each of these deals is different, the spokesman said.
Which leaves the commercial side of CSC’s business, representing the lion’s share of revenues. Like others in the professional services sector, Computer Sciences felt the economic slowdown, as demand from some of its customers wavered. Two large outsourcing deals in particular one with the telecommunications services provider Nortel, the other client unidentified had to be reconfigured, and profits margins suffered.
“They’ve gone through this period in the last nine months trying to recover from these things,” Grossman said. “During that period they lost some momentum in terms of bookings as well.”
In the third quarter, revenues in Computer Sciences’ commercial business, which includes outsourcing and systems integration work, rose 7.2 percent, to $2.2 billion, vs. $2 billion in the like year-earlier period. “We believe the key growth risk remains CSC’s commercial business,” said Prakash Parthasarathy, a Bank of America Securities analyst, in a recent note.
For the nine months ended Dec. 28, overall contract awards (including government contracts) totaled $10.2 billion. With contracts anticipated in the current fourth quarter, bookings are poised to exceed the nearly $11 billion received in the year ended March 31, 2001, the company spokesman said. Computer Sciences has also realigned some of its operations to streamline and control costs, he said.
Commercial IT outsourcing remains a primary growth engine, not only for Computer Sciences but for the entire technology industry, the company spokesman said. The newest trend is to outsource non-core tasks such as human relations, finance and administration, supply-chain management or claims processing. These services account for less than $1 billion of Computer Sciences’ annual revenue, but the market is projected by Gartner Group to double by 2005, to $234 billion from $119 billion in 2000.
Parthasarathy sees potential in this market, but he rates Computer Sciences a “market perform,” assuming slower commercial-side growth until signs of a stronger market emerge.
Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at
[email protected].
