The Best Choice In Computer Services

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the leaders in computer services, Computer Sciences Corporation (NYSE: CSC) provides a variety of services to its clients, including consulting, outsourcing, and systems integration.  With shares more than doubling since their 52-week low of $22.19 hit last summer, but still about 20% below their pre-recession high, should investors wait for Computer Sciences to cool off a bit, or will the gains continue?

About CSC

As mentioned, Computer Sciences Corp offers consulting, outsourcing, and integration services to its clients.  Their outsourcing services involve operating all or some of a company’s computing infrastructure. This includes, among other things, applications development, network operations, data center management.  They also provide business process outsourcing, which refers to things like call centers, or what people typically think of when they hear the term.

CSC’s other services include systems integration (designing, developing, and implementing systems), consulting services, and some software system licensing services. 

Competition

CSC competes with large computing services companies such as International Business Machines (NYSE: IBM) as well as smaller firms such as CACI International (NYSE: CACI).

IBM is one of the best known tech companies in the world, and has evolved into a systems, services, and software giant, in addition to producing the hardware products for which they are traditionally known.  Last year, IBM earned just 17% of their revenues from hardware, while services and software contributed a combined 80%.  This is why IBM is a threat to companies like CSC. 

However, as a larger, more mature company, IBM’s growth potential is not nearly as exciting, with 13% annual earnings growth projected over the next three years.  That being said, IBM trades for a very reasonable 12.3 times forward earnings.

CACI, on the other end of the spectrum, is a much smaller IT company, and has a similar product and service profile to CSC.  At just 9.6 times earnings, CACI looks to be the cheapest of the three, but this could be deceiving.  CACI is projected to earn $6.51 per share this year, and then experience negative earnings growth averaging 2.5% for the next few years.  This is a big red flag!  Furthermore, the company’s balance sheet is not too enticing.  The company has just $15 million in cash and over $500 million in debt, which is very significant for a company whose market cap is just over $1.4 billion.

Valuation and Growth

At 17.6 times forward earnings, I actually think that CSC is cheap when considering its growth projections and very strong balance sheet.  When the company announces fiscal year 2013’s earnings next Wednesday, they are expected to report $2.75 per share.  The analysts’ consensus calls for this to rise to $3.49 and $4.09 in 2014 and 2015, respectively, for earnings growth of 27% and 17.2%, respectively.  What’s more is that the company has a positive net cash (cash minus debt) position, which is one of my favorite things to see in a prospective long-term investment.  In fact, as a result of good management, the company’s net cash position has consistently improved over the recent years.

The Bottom Line

When it comes to investing in these computer services companies, I’d say you either have to go mid-size or large.  The little guys just have too many entry barriers to be competitive in this business.  While IBM is a rock-solid company whose earnings are growing at a more-than-respectable pace, CSC does look like the more exciting play here.  If you have a bit more risk tolerance, forward earnings growth of over 20%, a great balance sheet, and a decent dividend yield (1.7%) are a pretty enticing combination.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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