Leading Information Technology Consulting and Business Process Outsourcing Company, Computer Sciences Corporation (CSC) recently grabbed another Navy deal worth $220.0 million. We believe that the flurry of deals that the company has won in recent times has reasonably strengthened its order book position, which will be reflected in the company’s results over the next few quarters.
The deal has a one-year base period, with four one-year renewal options bringing the total value to $220.0 million. Couple of weeks back, the company got an extension of the U.S. Navy work order under the SeaPort Enhanced indefinite-delivery/indefinite-quantity (“IDIQ”) contract signed in April 2004. The $135 million work order for providing support services to Program Executive Officer (PEO) Aircraft Carriers also spans a one-year base period and four one-year renewal options.
The services to be provided by CSC will enable the Navy to manage PEO aircraft throughout its lifecycle, taking care of business and financial angles, as well as day-to-day operations support. So, most of the deal wins in the recent times has come from the government sector, which has provided substantial reorders to the company and also consists of the major portions of its customer base over the last several years.
As per the latest article by the government IT consulting website (www.cioinsight.com), state and local governments continue to set aside significant amounts for future IT spending, even after facing the most severe recession of this decade. So the demand for information technology is continuously growing in the public sector. The local and state governments have prioritized sectors such as justice, public safety and education for making fresh IT investments. As per new published data, the local and state government IT market is expected to be worth $58.4 billion in 2011, up from $54.8 billion in 2010.
We believe that CSC has the knowledge, skill and requisite technical expertise to grab a chunk of this government work in the coming year. This apart, the goodwill and relationship built by the company with the federal and state government departments over the years will give CSC an edge over others.
The company reported decent fourth quarter results and provided a positive outlook for fiscal year 2010. CSC is constantly growing through acquisitions that enhance its services portfolio and expand its operations in new markets. The company is also financially sound.
On the other hand, we are a bit concerned about the intense competition in the IT and cloud computing space from both big and small players such as Accenture plc. (ACN) and Hewlett-Packard Company (HPQ). Also, despite the considerable revenue opportunity, the company’s dependence on U.S. government spending limits margin expansion possibilities. So a little diversification from this business could make us more aggressive on the stock.
For now, we maintain our Neutral rating on CSC, with a Zacks #3 Rank.
Read the full analyst report on “CSC”
Read the full analyst report on “HPQ”
Read the full analyst report on “ACN”
Zacks Investment Research
