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Analyst Bucks Convention By Raising Questions in CSC Report

Analyst Bucks Convention By Raising Questions in CSC Report


Staff Reporter

It wasn’t an easy call to make.

When Rod Bourgeois, a senior analyst at Sanford C. Bernstein & Co., released a probing report on Computer Sciences Corp., he was flooded with negative comments from outraged clients who owned the stock.

But in a meeting with Bernstein higher-ups, Bourgeois was told by another analyst that his report was the hottest topic of conversation at an investor conference, where two portfolio managers said it was the best analysis they had seen in a long time.

Bourgeois, a graduate of Harvard Business School and a former technology consultant at McKinsey & Co., did more than expose a messy issue at a large corporation, sending the stock on a 12 percent decline. He sent a ripple through the investment community by questioning the way Computer Sciences capitalizes its costs.

“It’s very difficult to raise these issues and not imply that there is some sort of (impropriety),” said David Grossman, an analyst at Thomas Weisel Partners in San Francisco. He also covers Computer Sciences, which is based in El Segundo.

The industry is still stinging from a spate of scandals that involved not just executives but analysts who had become too cozy with investment bankers trying to obtain business from the companies they covered.

Bourgeois is one of a growing number of sell-side analysts who are mustering the courage to ask pointed questions and closely examine the numbers even at the risk of a backlash from the companies.

After Bourgeois’ report, Computer Sciences issued a terse press release defending its accounting of outsourced contracts. It has refused to make any additional disclosures.

Perhaps it was not surprising that fellow analysts greeted the report with deafening silence, as well. A few acknowledged wondering themselves why the company’s cost capitalization was steadily rising over a long period even while new contract signings had fallen dramatically. But their curiosity apparently went no further than that.

The timing of the report was also thorny. Computer Sciences was in the midst of raising $300 million through a debt offering. Two analysts Jefferies & Co.’s Joseph Vafi and A.G. Edwards & Sons’ Gregory Gieber upgraded their ratings on Computer Sciences. Neither of their companies was involved in the debt offering.

Analysts admit that disclosure remains insufficient at many information services companies that engage in complex long-term outsourcing agreements.

“The investment community has little access to the details,” said Michael Keller, an analyst at McDonald Investments, a division of Key Corp. Analysts are left to guess the terms and costs related to contracts and how they are amortized over several years.

“This is such a basic topic,” said Sam Cooper, a fixed-income analyst at Morgan Keegan, noting that WorldCom capitalized costs that should have been booked as expenses. “It’s not unreasonable to suggest that the company give a little more disclosure.”

Moreover, Bourgeois, who spent six months analyzing data before issuing his report, has been nearly vilified for going out on limb in pointing out red flags in Computer Sciences methods. While most analysts admit that monitoring irregularities on a company’s books are part of the job, only a handful are willing to stand up and question its executives.

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