Wall Street brokerages sprang to Computer Sciences Corp’s defense yesterday with bullish earnings projections after an adverse brokers report on Tuesday sent shares in the number-four computer services firm into a 12% tailspin. Computer Sciences clawed back 6.91% of its share value to end the day’s trading at $64.75 as three brokerage firms watching the El Segundo-based firm rallied around with upbeat earnings expectations.
Donaldson, Lufkin & Jenrette raised Computer Sciences to a buy recommendation from market perform while Credit Suisse First Boston upgraded its rating to buy from hold and said it expected the share price to rise to $75 over the next six months. The ratings signal that Computer Sciences is considered an attractive investment proposition producing returns for investors from profitable operations. Credit Suisse increased its earnings- per-share expectations for Computer Sciences in fiscal year 2000 to $2.54 from $2.49 – the firm’s own stated profit target. Computer Science has also said it expects to report $9bn revenue for the fiscal year ending March 31, 2000.
Brokerage firm Merrill Lynch reiterated its buy rating on the stock in a research note issued yesterday adding that Tuesday’s stock price fall was unwarranted. It said the firm is not susceptible to a Year 2000 buying moratorium which is pinching many software firms’ financial results. Merrill, which rates the stock one of its strongest recommendations, raised its target price for the stock to $85.
Tuesday’s share price dive was apparently triggered by a research note from Lehman Brothers which cut Computer Sciences back to buy from its top outperform rating. The brokerage firm cited weakening overall demand for IT services and software, and uncertainty due to protracted delays in the award of an outsourcing deal by defense contractor, Raytheon. Computer Sciences has been short-listed alongside number-one computer services firm, IBM Global Services, for the contract which is worth around $1bn over seven years.
Mega outsourcing deals are becoming increasingly commoditized, Credit Suisse said yesterday, which is depressing profit margins for firms like Computer Sciences by forcing them to compete on price. However Credit Suisse and other analysts said Computer Sciences’ $6bn order boook plus a likely order pipeline worth between $2bn and $3bn added up to a rosy outlook for the firm.
As well as the Raytheon deal, Computer Sciences has been short- listed for a similar-sized contract with the County of San Diego plus another unspecified commercial contract. Computer Science saw profit increase by 20% last quarter – outpacing a 13% industry average – and matching market expectations of 48 cents a share. Revenues hit $2.06bn from $1.75bn in the year-ago.
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