The recent contract win from the U.S. Navy reinforces the fact that, Computer Sciences Corporation (CSC) continues to foster a very strong business relationship with the U.S. Government departments. The U.S. Navy engineering contract is worth up to $38.0 million to provide engineering support to the Naval Air Warfare Center Weapons Division.
The contract has a one-year base period and also carries two one-year renewal options. Government order wins have emerged as a strength for the company over the years.
During the last week of December 2011, Computer Sciences entered into a one-year contract worth $67.0 million with the U.S. Department of Homeland Security (DHS). The agreement bears a one-year and two six-month extension options.
The recent deal marks the company’s fifth consecutive government contract win over the past four months. First, the company won a contract worth $25.0 million from the U.S. Department of State Bureau of Consular Affairs, to conduct consular operations in Tel Aviv department of Jerusalem.
The continuous deal wins for the company ensure incremental cash flows. However, CSC is facing several headwinds in Europe and concerns linger regarding its ability to consistently improve its operating margin performance.
Moreover, there are some headwinds pertaining to the NHS contract, which may pose a considerable challenge to CSC. These include the Audit Committee investigation into CSC’s accounting practices, which may lead to significant legal and accounting costs.
This apart, the company is also entangled with a class action lawsuit by multiple shareholders related to the alleged violation of securities laws in connection with business representation. A decision on the same issue is pending, and may result in potential losses if it goes against the company.
The company’s third quarter 2012 results were impressive with EPS exceeding our expectation. Although the company is wining new deals at regular intervals, but we prefer to remain cautious given the intense competition in the IT and cloud computing space from both small and big players such as Accenture plc (ACN) and Hewlett-Packard Company (HPQ), European exposure and strained federal budgets.
The company has a Zacks #3 Rank, implying a short-term Hold rating.
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