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IT SERVICES

Analysis of Computer Sciences Corp.’s First Half FY04 Business Results

War Is Great!

CSC Thriving in Global War Economy: Government Business Almost Doubled

PHOENIX, November 12 – “War is great!” - could be the new mantra of Computer Sciences Corp. (CSC), juxtaposing the “Allah Akhbar” (“God is great!”) chants by Islamic warriors.  It’s just that there is nothing idealistic or religious about CSC’s war profiteering.  The company’s federal government business is booming, especially the “death merchant” (Pentagon) portion.

Thanks to its acquisition of DynCorp earlier this year (see “Back to the Future,” February 2003), CSC’s U.S. government revenues have nearly doubled (from $772 million in second quarter of FY02, to $1.52 billion this year).  Revenues related to the Pentagon contracts more than doubled (from $449 million last year, to $985 million in the latest quarter).  This vaults CSC into the No. 6 position on the Pentagon Top 50 list. 

And CSC’s winning pace in Washington seems to be accelerating.  About 80% of its new contract sales in the latest quarter ($3.5 billion) were the federal government awards.  By contrast, only about $700 million of its new contract sales came from the commercial sector.

The 29-month federal “pipeline of opportunities” is about $41 billion, CSC said.  Approximately $15 billion of that total will be awarded during CSC current fiscal year that ends March 31, 2004.  CSC leaders are hoping to win “more than our share.”

“We don’t see much of a difference depending on which administration is in power,” said Van Honeycutt, CSC’s CEO, during a teleconference with analysts that followed the release of the second quarter fiscal year 2004 results.

We agree.  Bill Clinton kow-towed to the U.S. arms manufacturers’ interests when he was president, as has George W. Bush been doing, especially since 9/11.  Check out our May 1999 report “War Is Great…”, for example, to see how CSC and other “death merchants” also benefited from the wars of the Clinton administration.

CSC Stock Surges

Meanwhile, Wall Street lapped up the CSC second quarter report, boosting its stock by nearly 10%, just as it did nearly six months ago, following the company’s final FY03 release (see “Less Than Meets the Eye,” May 2003).  And it did it on a day when the market remained virtually flat (see the CSC vs. S&P chart).

Investors and traders ignored a sharp drop of new contracts in CSC’s commercial sector ($0.7 billion versus $3.9 billion in the first fiscal quarter).  They focused on the aggregate new contract sales for the first six months of the fiscal year 2004 ($7.8 billion) that have already exceeded the total new business in its prior fiscal year ($7.7 billion in FY03).  Never mind that the latter represented a sharp (32%) drop from the $11.2 billion in new contract sales during the fiscal year 2002.

Furthermore, CSC revenues declined by about 2% in the U.S. and Asia/Pacific commercial sectors during the second fiscal quarter.  But the company’s European business thrived.  It was up 21% over the same period a year ago.  CSC credited outsourcing for the jump, as systems integration and consulting continued to lag behind.

Wall Street also ignored CSC’s shrinking margins, caused in part by the DynCorp acquisition.  Gross margins declined from 20.1% in FY03 to 17.6% in the latest results.  Net margins dipped below 3% for the first time in three years (2.8%).

Stock Market Quirks

So given the foregoing, you’d think that CSC is the new darling of the stock market investors and traders?  Think again.  Hard.  It was another truly beleaguered company that has outperformed both CSC and IBM in the last six months.  Believe it or not, that company is EDS!  (see the second chart below).

As you saw from our last Annex Bulletin, it is EDS that faces truly formidable challenges, such as reversing a 41% decline in new contract sales this year (see “Pain Without Gain,” Oct. 29, 2003). 

And then, just in case that you’re left scratching your head over that Wall Street quirk, let us give you another one, this time from the Paris Bourse by way of a quick stock market quiz. 

Which of the following top six global IT services competitors has shown the best stock market performance in the last six months (in alphabetical order):

1.     Accenture

2.     Cap Gemini Ernst & Young

3.     CSC

4.     EDS

5.     HP

6.     IBM

The correct answer is No. 2 – CGE&Y.  This Paris-based contented has outperformed IBM, for example, by a six-to-one margin!  (see the chart below).

Surprised?  Who wouldn’t be… The stock markets of the world are evidently using some “new logic” to determine the performances of various companies.  Especially considering that one of the competitors that did not end up on top – Accenture Ltd. - has been setting new 52-week highs nearly every day in the last week or so.

Happy bargain hunting!

2003: "War Is Great!" (Nov 13),  "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)

Volume XIX, No. 2003-19
November 12, 2003

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

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