Founded in 1959, Computer Sciences is one of the largest and oldest providers of IT solutions. The company has a dominant position in most of the key markets worldwide, and while many technology companies could be value traps, CSC is a huge value play.
Let's take a look...
CSC's sales have consistently increased over the last decade from $11 billion to over $16 billion, while at the same time, the company has bought back over 10% of their outstanding shares, which has helped it boost EPS from $2.01 back in 2002 to $4.51 over the last year.
More importantly, the Buffett indicator shows the management has done a great job allocating capital to build book value, taking it from $21.17 to $48.58 in the last decade.
On September 14, Computer Sciences (CSC) announced that it will be acquiring AppLabs, an Indian firm it refers to as "the world's largest pure-play software testing and quality management service provider." The company sees the purchase improving its testing capabilities, and if the estimates are close, a 21% average annual growth for the market.
This was a great move, and the reason I mention it is because over the last three years, the stock has traded with a very low P/E. At the beginning of the decade, CSC had a P/E of 20x and a price to book over 2x. Today, the company has a forward P/E of 5, a price to book (P/B) ratio of 0.5, and price to cash flow (P/CF) ratio of 2.5. And, it's the best of the breed.
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The challenges for Computer Sciences, which could already be priced into the stock, include sluggish government spending. It's not a secret that the country is broke and all the spending that it is doing is coming out of money it prints, not real savings or tax income. However, in the case of CSC, I feel they are insulated from huge cuts because over the next 10 years, terrorism will not be bombs on the metro, but attacks on government data and intelligence.
So, while CSC derives most of its revenue outside the realm of public services, the government will still spend on IT. This is exactly why it will thrive while companies like L3 (LLL), General Dynamics (GD), Northrop Grumman (NOC), and other defense contractors will suffer.
The market is a finicky place where one minute traders are willing to pay up for a company's earnings and another they discount them too far. In the case of CSC, the current multiple is too low, in my opinion, and could easily be 10x in a year. That would put the stock around $45 - $47 per share, an increase of close to 100%. Plus, with the recent decline in the overall market pushing all stocks lower, this could be a perfect time to buy into the company.
For long-term investors, if the company keeps up with share buybacks and it’s able to generate higher net income from strategic acquisitions, you could see a $7 or $8 per share number 10 years from now, giving the stock a price over $100. That’s a four-fold increase from yesterday’s closing price.
The Guru Play
The largest position in the company is held by Dodge & Cox (10% of the outstanding shares), with Brian Rogers, and Richard Snow also owning a small piece of the company. All own the stock in the high $30s, and if they hold onto the company, you will be up 42% when they are breaking even.
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