CSC’s Numbers Don’t Match Lofty Price Tag

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Will Computer Sciences Corp. actually be sold?


Wall Street is sharply divided given the disparity between the El Segundo-based company’s lackluster earnings and its lofty $12 billion suggested purchase price.


Given the stock’s recent trading, institutional investors appear to be gunning for a sale. Shares have jumped nearly 25 percent in the past two weeks, to a high of $59.30 a share, although the stock recently retreated to between $52 and $54.


Computer Sciences has been the target of takeover speculation since late October when the Wall Street Journal reported that three private equity firms Texas Pacific Group, Warburg Pincus LLC and Blackstone Group were considering buying the company’s corporate business, with Lockheed Martin Corp. picking up its lucrative government contracting side. The Journal said that the possible offer price was between $64 and $65 a share.


None of the companies has confirmed that a deal is in the works, and Computer Sciences declined to comment.


Sanford C. Bernstein & Co. analyst Douglas Harned argues in a recent report that Lockheed Martin shareholders would be better served looking at other targets. Other analysts have echoed that view, claiming that lackluster growth is why the company has been out of favor on Wall Street. Citigroup lowered its rating last week to “hold” from “buy,” citing concerns that Computer Sciences’ core business is slowing.


On the plus side, large aerospace and defense firms are salivating at the chance to pick up government contracts without the burden of its commercial business. Computer Sciences is expected to report $15 billion in revenue next year, with $5.2 billion coming from federal government contracts.


Analysts generally doubt that potential buyers can eke out enough cost savings to justify such a high purchase price that would also saddle the company with increased debt.


Rod Bourgeois, an analyst at Sanford Bernstein, said the company’s cash flow is unsustainable because two-thirds comes from customer prepayments.

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