Computer Sciences And Billionaire David Einhorn's Investor Letter

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

Why does Einhorn love Computer Sciences (NYSE: CSC)After breaking down why billionaire David Einhorn still loves Marvell Technology, it is time to take a look at another pick that Einhorn has outlined as one of his favorites, Computer Sciences. Greenlight managed to return only 4.9% during the fourth quarter, pushing the hedge fund’s total net return for 2012 down to 7.9% (see the top performing hedge funds), but he's betting on Computer Sciences to turn that around in 2013. Einhorn had this to say about his bet on Computer Sciences…

We believe that CSC has earnings power in excess of $4.00 per share and the new management team is capable of turning the company around to achieve those earnings, and possibly more. 

Analysts expect Computer Sciences to post EPS for fiscal year 2013 (ending in March) of $2.40, then $3.36 in 2014. Einhorn’s belief that the company can generate over $4 in earnings per share may sound over the top, but it is not that far-fetched (see what Einhorn's newest picks were). The last three quarters have been unusually poor for Computer Sciences, but solid quarterly earnings performance is possible, as seen from its past:



The big dips of late have been related to restructuring charges and expired Department of Defense contracts. However, the company believes it will be able to save $1 billion over the next 18 months thanks to restructuring. Einhorn has been adding to his Computer Sciences' position over the past few quarters, betting on this restructuring. Einhorn and Greenlight first took a position in Computer Sciences during 1Q 2012, and upped his stake 50% during 2Q 2012, then another 90% in 3Q 2012 (check all the stocks Einhorn owns). 

Computer Sciences is one of the largest IT consulting firms in the world and was recently selected as a key contractor for the Dept. of Homeland Security. The beauty of the government contracts that Compute Sciences are able to secure is that they provide stability to cash flow generation, given the length of the contract and relative soundness of the government. Einhorn's investment thesis relates to the fact that Computer Sciences is still a fundamentally sound business that has...

...margins well below that of its peers as a result of organizational inefficiencies, historical mismanagement, and various non-recurring charges that obscured underlying earnings. In addition, the company owned several valuable assets, including its high-margin Equifax credit services affiliate that we believed could be monetized at an attractive multiple.

A number of Computer Sciences' peers have also been struggling, but not Cognizant Technology (NASDAQ: CTSH), another IT consulting firm that is a leader when it comes to offshore activities. Cognizant plans to tap new geographic markets that include Europe, Asia Pacific, Latin America, and the Middle East. The tech company has also been expanding its footprint in China, where it sees the market as being the next big market for outsourced offshore IT infrastructure. 

Infosys (NYSE: INFY) has lagged its top peer Cognizant when it comes to performance. Over the past twelve months Infosys is down around 8%, where Cognizant is up 7%. This is due in large part to Cognizant's larger exposure to the higher growth consulting markets of financial services and healthcare. Infosys did manage to see double digit growth in its consulting and systems integration segment per last quarter’s earnings announcement.  

Syntel (NASDAQ: SYNT) is another competitor that has been performing well of late, having beat analysts’ estimates by at least 20% over the last four quarters. However, the string of solid performance might not continue, where the company has lowered full year 2012 EPS guidance three times in the last six months, and fiscal year 2013 EPS is expected to come in flat relative to 2012.

One of the biggest players in the global IT consulting industry is International Business Machines (NYSE: IBM), which gets around 20% of its revenue from global services and consulting. The tech giant is focused on enterprise markets, which includes a focus on support for analytics and cloud computing. IBM is a leader in the application infrastructure market and should remain so; Garnter estimates that IBM owns 32% of the middleware market, with Oracle at in second at only 17%. 

Don't be fooled. Computer Sciences trades at an elevated P/E after beating expectations handedly over the past two quarters. However, in looking at the stock's price to sales multiple, Computer Sciences trades well below its peers:  

 

Price to Sales

Computer Sciences 

0.47

Cognizant Technology

3.02

Syntel

3.25

IBM

1.93

Infosys

3.90

The stock also appears to be executing its turnaround and restructuring plan nicely. Earnings results earlier this month showed that quarterly revenue was up year over year, and the company boosted 2013 guidance; saying that earnings will come in better than expected thanks to profit margin expansion due to cost cutting improvements. If Computer Sciences manages to reach Einhorn's predicted $4 per share of earnings, and assuming it trades at a P/E multiple of 17 (which is the average of its peers) the upside is nearly 50% from its current trading price of around $46. To boot the stock pays a 1.7% dividend yield.

See what else we found in Einhorn's letter, Part 1 (saviors of 2012), Part 2 (big bets for 2013), Part 3 (Marvell Tech).

 


mhargra has no position in any stocks mentioned. Marshall Hargrave is a registered investment adviser with Bridgewater Investments. 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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