ModernGraham Valuation: Computer Sciences Corp (CSC)

Company Profile (obtained from Google Finance): Computer Sciences Corporation (CSC) is engaged in the information technology (IT) and professional services industry. The Company’s clients consist of governments and commercial enterprises, which rely upon the use of information services and associated systems for the conduct of their operations. These clients engage with industry specialists for the development, deployment, and ongoing operation of IT services and IT-enabled business operations. CSC offers a range of services to clients in the commercial and government markets and specializes in applying contemporary practices towards the employment of IT. CSC’s service offerings include IT and business process outsourcing; emerging services, such as cloud computing and cyber-security protection, and a range of other IT and professional services. Effective August 6, 2013, Computer Sciences Corp acquired Infochimps Inc, an Austin-based provider of online data access services.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
6. Moderate PEmg ratio – PEmg is less than 20 – PASS
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

Balance Sheet – 9/30/2013 

Current Assets	$5,327,000,000
Current Liabilities	$2,837,000,000
Total Debt	$2,448,000,000
Total Assets	$10,773,000,000
Intangible Assets	$2,549,000,000
Total Liabilities	$7,503,000,000
Outstanding Shares	147,630,000

Earnings Per Share

2014 (estimate)	$4.09
2013	$3.20
2012	-$27.38
2011	$4.51
2010	$5.28
2009	$7.32
2008	$3.20
2007	$2.16
2006	$3.07
2005	$2.59
2004	$2.75

Earnings Per Share – ModernGraham 

2014 (estimate)	-$2.31
2013	-$4.14
2012	-$5.68
2011	$4.95
2010	$4.84
2009	$4.31

Conclusion:

Computer Sciences Corp has been significantly affected by the large loss in earnings during 2012.  The loss was so great that it alone has caused the company to fail two of the requirements of the Defensive Investor and two of the requirements of the Enterprising Investor.  As a result, for the next few years, this company will not be suitable for either investor type, until the company has recovered from the effects of posting such a deficit.  Value investors seeking to follow Benjamin Graham’s methods may be better suited with other opportunities, and may wish to review ModernGraham’s valuation of International Business Machines (IBM).  From a valuation perspective, the loss also affects the way the ModernGraham valuation model views the company.  EPSmg (normalized earnings) dropped from $4.31 in 2009 to an estimated -$2.31 for 2014, clearly due to the fact that EPSmg takes into account each of the last five years of earnings data when determining a normalized earnings figure.  Such a drop in earnings leads the model to return a poor valuation, indicating that any value in the company must come from a source other than the earnings.

What do you think?  Do you agree that Computer Sciences Corp. is overvalued?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

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Disclaimer:  The author did not hold a position in Computer Sciences Corp (CSC) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill