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Excerpts from the Confidential Client Edition
IT SERVICES
Analysis of Computer Services Corp.’s
FY03 Business Results
Less Than Meets the Eye
Stock Rose Nearly 10% after Earnings Release, But Look Under the Hood
PHOENIX,
May 16 - The fact that Computer Sciences Corp.’s (CSC) stock rose
nearly 10% following its fourth quarter and full fiscal year 2003 earnings
release on May 13, goes to show you how easy it is to pull the wool over
Wall Street analysts’ eyes.
Goldman Sachs, for example, one of the most respected Wall Street
firms, even upgraded the stock the following day, giving the CSC shares’
rise additional impetus (see a May
14 Reuters wire report).
An even greater PR yarn-spinning feat for CSC was that its market cap soared by over $600 million on the day the Dow Jones, IBM, EDS and other major competitors’ shares declined (see “CSC Zigs as IBM, EDS Zag…”-chart).
[snip]
So what’s wrong with that? Well, take a look under the CSC hood…
[snip]
Declining New Contract Sales
Take CSC’s new contract sales, for example, perhaps the best indicator of what’s ahead for companies with annuity-type income streams, such as IT services firms. The company reported $7.7 billion in new business awards during its latest fiscal year (ended Mar 31), versus $11.4 billion during the previous 12 months. That’s a 32% drop!
[snip]
A broader comparison of CSC’s latest sales record with IT services industry’s top competitors shows that this California-based company has by far the worst Book-to-Bill ratio of the Top 5 competitors. In fact, CSC’s FY03 ratio was only about half that of the other top four vendors (see the above charts).
[snip]
Shrinking
Commercial Revenues
This means that CSC’s past is looking better than its future when it comes to internal growth. And that its expected FY04 revenue growth (to between $14.3 billion to $14.7 billion, according to the company’s release, or to $14 billion, per our forecast), will come basically from its DynCorp acquisition. Strip that away, and you have a shrinking company.
[snip]
Slim Margins
Such takeover opportunities are usually accentuated if the target company loses money or has meager profit margins.
[snip]
Also,
as CSC is trekking “back
to its future,” it’s facing a “death merchant’s” worst
nightmare - that peace may break out.
In which case CSC would once again look like fish out of water
among the top global IT services competitors, as it did when the Cold War
ended.
Granted,
this may be a far-fetched fear given Dubya’s imperialistic agenda.
But governments change, as do their policies.
Prudent business leaders take that into account when devising
long-term strategies.
In short, CSC is a lot less than meets the eye. But as usual, it will probably take Wall Street some time to discover it.
[snip]
"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (8 pages in print edition), along with all charts which back up our story.
Qualified media and friends of Annex may request a TEMPORARY User ID and Password by clicking here and explaining why they wish to have access to this particular Annex Bulletin. Or call Bob Djurdjevic at 602-824-8111 (cell) to promise not to copy it or otherwise republish it.
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Happy
bargain hunting!Bob Djurdjevic
For additional Annex Research reports, check out...
2003: "Less Than Meets the Eye" (May 16), "Back to the Future" (Feb 5)
2002: Analysis of CSC FY02 results (May 17, 2002), "A Disastrous Quarter!" (Apr 17, 2002), “Tough Times, Soft Deals,” (Apr 25, 2002)
A selection from prior years: Analysis of CSC calendar 2000 results (Mar 26, 2000), CSC's FY2000 Business Results (May 10, 2000), Business Is Humming Nicely (Nov 3, 2000), CSC 3Q2K, CIO Survey (Feb. 29, 2000), CSC: A Mouse That Roars? (Nov 1998)
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