CSC Looks Evenly Poised

The winning spree for Computer Sciences Corporation (CSC) does not seem to end, as the company has again won a deal worth $50.0 million to provide analytics modernization services to the Department of Defense (DoD). This is a subcontract awarded to Computer Sciences, by a California-based company, Northrop Grumman Corporation (NOC), which will provide analytics modernization services to the Department of Defense.

As per the terms of the agreement, the tech major will provide analytics and framework services as well as technological support to DoD’s analytics modernization services. CSC is a trusted government contractor and subcontracting appears to be expanding the market for the company, enabling it to serve new segments.

Moreover, the company also secured an order extension recently, according to which Computer Sciences is to continue supporting Swiss Re’s Admin Re business. The two companies have jointly developed strategies, which are expected to drive greater efficiencies in administration, improve customer service procedure and enhance the system alignment procedure.

The whole enhancement process will incorporate Computer Sciences’ CyberLife software, Customer Service Accelerator and Claims Management Accelerator. This marks the continuation of the 15-year long relation between CSC and Swiss Re.

The company is experiencing good business flow from the mainstream industry, but order flow in the outsourcing industry seems to have dried up. Sluggish IT outsourcing bookings and weak order renewal rates have weakened the outlook for this segment, as growth in the outsourcing services business is expected to be relatively slower in 2011.

The company is also concerned about lower bookings and delays in government order placement. On the other hand, the company continues to see a steady flow of business out of the healthcare, hospitality, logistics systems, intelligence and Information Technology security markets.

We are optimistic about the company, based on the positive outlook for these markets in fiscal 2011, its enhanced product portfolio, growing customer base and the gradual recovery in the macroeconomic scenario. Moreover, Computer Sciences has been augmenting these strengths with a number of acquisitions that have enhanced its services portfolio and expanded its operations into new markets.

We concede that the outsourcing business is not doing that well. Additionally, the company is targeting cloud computing, which is an area with tremendous opportunity but equally intense competitive pressure from both big and small players, such as Accenture (ACN), Hewlett Packard (HPQ) and International Business Machines (IBM).

Consequently, we have a long-term Neutral rating on CSC shares. We also have a short-term Hold rating on the shares, as indicated by the Zacks #3 Rank.

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