Is Mike Lawrie Driving a Turnaround?

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

Computer Sciences Corporation’s (NYSE: CSC) jumped 12% after it reported its 2Q13 earnings, surpassing analysts’ expectations. The company has significantly outperformed its large cap peers Accenture (NYSE: ACN) and International Business Machines (NYSE: IBM) this year returning 49.07%. I believe the company is still a good buy given its forward PE of just 10.80 that is lower than both Accenture and IBM. Also, given its much smaller size and with its new CEO Mike Lawrie’s restructuring efforts, the company is positioned to give better returns than its large cap peers.

Company Name

Current Stock Price

YTD Gains

Market Cap (billion)

Forward P/E

Computer Sciences Corporation

35.33

49.07%

5.49

10.80

Accenture

65.95

23.89%

52.22

14.12

International Business Machines

190.10

3.37%

214.80

11.42

I believe at this is a good entry opportunity for investors, as we already have seen an improvement in the company’s operations since the new CEO, Mike Lawrie, joined the organization. He laid down a cost cutting and operational restructuring plan, the effect of which is reflecting in a positive manner in its revenue and growth figures.

 I am detailing the company’s forward looking strong fundamentals below- 

Cost Saving Program

Computer Sciences Corp aims to streamline its operating activities with a cost cutting target of $2 billion by 2017. For FY13, the company has already achieved $280 million out of the $500 – $600 million target for the year. This cost cutting program centralizes all operations across all geographies and all key functional areas such as Marketing, HR, and Finance.

  • Major focus areas- Cutting the management layers from 13 and bring it down to 7-8.
  • Bring improvement in the supply chain and the procurement division. For that purpose the company is limiting its purchasing activities to key vendors only.
  • To reduce overhead expenditure.

Also included in the restructuring plan is contract management under which the company has a contract review process to track the results of bid models ad timelines.

Cost savings from these steps will improve operational efficiency and help the company to use the money thus saved for reinvestment for workforce optimization, marketing activities, enterprise tools, and systems.

New Contracts

Computer Sciences signed a contract in 2Q13 with the Zurich Insurance Group (leading insurance provider). This contract is a replacement of the agreement signed in July 2004. The 7 year term contract with a provision of optional extension covers application maintenance and development services. It is aimed to expand Zurich’s operations across Switzerland, Canada, Germany, Italy, U.K. and the U.S. A new master agreement will be signed in January 2013 to begin the process.

In a recent deal CSC won a $54 million order from the U.S. Immigration and Customs Enforcement (ICE) Office of Professional Responsibility. Under this assignment, CSC will conduct Background Investigations for Immigration and Customs Enforcement.

The FDIC also appointed CSC for a project worth $475 million to provide IT infrastructure support.

Returns through Acquisitions

Computer Sciences acquired the 42Six Solutions which specialize in big data processing and advanced applications software development serving the U.S. Government Intelligence Community (IC) and the Department of Defense (DoD). 

Additionally, the acquisition of AppLabs Sep11 has reaped benefits in the 2Q13. The managed services revenue grew 1.1% (~25 million) due to the acquisition.

As part of the services portfolio balancing, company is selling out its non-core assets in Italy. Computer Sciences is selling its consulting and systems integration services business to the Dedagroup.

New Launches

CSC BizCloud™ VPE (Virtual Private Edition) was launched in Aug12 to serve enterprises with an easy to go path for private Cloud.  Many large private as well as Government organizations prefer BizCloud and ‘BizCloud for Government’ which are easily installed private clouds on customer premises and which reduce capital investment.

Summing it up, the restructuring steps bring efficacy in core businesses and further investments and divestments strengthen its portfolio. Also, with the smoothening of operations we can expect the company to make corrections to its problematic contracts and increase its operating margin. Recently it reached a settlement with NHS which will further increase its FY13 revenue. Its ‘Managed Services’ division backlog increased by ~1 billion bringing the current backlog to $34.8 billion. Recovering from the earlier losses, the company stands high with a strong balance sheet and FCF of $237 million a Y/Y improvement of $505 million. I see this stock a buy.

 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend Accenture Ltd. and 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.If you have questions about this post or the Fool’s blog network, click here for information.

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