Mike Lawrie’s Christmas present

Mike Lawrie got the Christmas present he wanted this week  - a proposed settlement of  the SEC investigation into accounting irregularities between 2009 and 2012 in the Nordic region, Australia, and the UK NHS contract.

The terms of the proposed settlement are less important than the fact that a significant uncertainty - one which could deter a potential buyer – will be closed, improving the prospects of a sale of CSC.

As a result of the settlement, CSC will pay a penalty of only US$190million and initiate a review of its compliance policies. The latter should have been done by now anyway. In our opinion, this “punishment” is little more than a tap on the wrist for CSC.

The SEC concluded that CSC should have booked the US$1.16 billion NHS impairment charge in FY2011 rather than FY2012. No surprise. We and others had reservations about CSC’s handling of the NHS contract well before 2012. Following on from this, CSC will also move the related US$2.51 billion of goodwill impairment from FY2012 results into FY2011. The net income of FY2010 will also be restated downwards by US$50million reflecting the impact of the Nordic accounting irregularities.

Further details of the proposed settlement of the SEC investigation can be found here or at;

http://www.streetinsider.com/Corporate+News/Computer+Sciences+(CSC)+Enters+Settlement+with+U.S.+SEC%3B+Will+Pay+$190M+Penalty/10124952.html

So what does all this mean?

• Mike Lawrie has removed a significant balance sheet and earnings risk that arose well before his arrival at CSC. He will likely be congratulated on having negotiated such a good settlement.
• There is some restating of the timing of historical events, but no investor is likely to care about that.
• The shareholders who suffered between 2009 and 2012 now see their investments worth over US$60 per share.
• A number of employees directly involved in the irregularities were reprimanded, suspended or terminated.

So is all well that ends well?

We think not !

The European and Corporate Presidents and other executives on whose watch these irregularities occurred have not, as far as we are aware, been held accountable for these failures. Instead, they were richly rewarded, receiving large amounts in direct compensation and termination packages. The risk of lawsuits against them is now almost certainly  passed.

Meanwhile many honest hard-working employees who had no connection at all with any of these failures and irregularities lost their jobs in the aftermath. But who cares about them?

The King has no Clothes………...analyst says CSC stock currently worth $40 or less!

A Wall St analyst covering CSC has said that the king has no clothes.  At last!

According to an article in Washington Business Journal; Rod Bourgeois, founder of DeepDive Equity Research, 

describes CSC as a risky bet whose current value is between $33 and $40  Our thanks to the reader who told us about this article, which can be found here

Bourgeois knows CSC well, having previously followed them

as an analyst for Sandford C Bernstein.  He did not behave

like a CSC groupie at the quarterly Analyst conferences, but nor did  we hear him expressing much skepticism of CSC pronouncements either.   Maybe he is now giving his own opinion instead of having to express the party line of his former employer. 

The reasons he gives for his opinion are:

·      Emerging Patterns suggest CSC turnaround effort is stumbling

·      Revenue and margins below expectations

·      “Over-earning” from balance sheet improvements; cost      savings now largely realized

·      Choppy cash flow, with recent improvements being due to short-term factors such as tax and pension benefits

·      Lack of specifics on the second phase of the company’s turnaround plans.

Mr Bourgeois compares CSC turnaround efforts to those of 

EDS, which failed when the focus turned to revenue growth. He also feels that a CSC takeover could be viewed as a desperation-move for an acquirer.

With a current price of around $66, there is a tremendous 

risk involved in CSC shares today, if one believes Mr Bourgeois’ thesis, which we do and as we have said for some time.

We also wonder how confident other Wall St analysts are 

with their employers’ official opinions and published target prices for CSC.  Or now that Rod Bourgeois has said that the king has no clothes, will other analysts start getting real?

All together now ............

The King is in the altogether, but altogether, the altogether He's altogether as naked as the day that he was born The King is in the altogether, but altogether, the altogether It's altogether the very least the King has ever worn"

 posted by Littlejohn

A Christmas Tale

And it came to pass that when the King was mocked by the Money Changers in The Temple for the treasury was empty and the empire was shrinking – even into dust, in a rage he sent 200 mercenaries, saying to them: 'lay waste to yet more of the lazy peasants in the villages for they maketh little and cost too much. Doeth it and I will enrich you'

 And these peasants were sore afraid for they were blinded by Beelzebub who had closed their eyes to their goodness; pouring poisons into their ears saying ‘there is no work and no where to hide - you are not of our grade’. And many, groaning with a loud voice, said: ‘O Labour Market, receive us into thy bosom’. And lo many ads did suddenly appear in the vacancy pages and jobs were found – yeah even better than those they had left, in lands flowing with milk and honey. And a light shone about them, for the angel of the Market was with them, watching over them. They sung songs, and drank much in thanks for their salvation.

Here endeth the first lesson.

CSC Q2 FY15 earnings call - the same old song………….

CSC announced their results for Q2 FY15 (quarter to 3 October 2014) on November 6.   And to the surprise of very few CSC watchers it was the same old song:

• EPS up by 17% compared with Q2 FY14 due to cost take-out. Beating Analysts' consensus by $0.17
• Guidance range for FY15 EPS increased by $0.10c

• Revenue down 4% year-on-year in constant currency
• Operating margins stagnant at 11.3%
• New business wins for the quarter were $3.0 billion, down almost 30% from Q2 FY14 and once again below the revenue replenishment level.
• Operating cash flow for the quarter of $217million and free cash flow of $31million, down 20% and 64% respectively from the previous year.
• Share repurchases were $278million or 128% of total Operating cash flow; in comparison cash flow used for investments was $184million.

Despite the positive spin put on the results by CEO Mike Lawrie  “ CSC delivers continued earnings growth”  the real story lies elsewhere in the numbers . Declining new business wins, dropping revenue levels, an exodus of experienced managers, and stagnant operating margins despite all the cost take-out suggest a business in trouble. That the company “invests” more in share buybacks; a questionable 'value-add' activity, than in developing business suggests the management team has run out of ideas and is reduced to using financial management strategies to maintain the share price. 

How long can it last?

Unusually, the share price dropped 5% after this earnings announcement, suggesting that analysts and investors are beginning to feel less comfortable with CSC’s outlook and are (finally?) developing some healthy skepticism with Mike Lawrie’s promises of a bright future.
The next few months will be interesting at CSC . 
Will Mike Lawrie manage to cut even more costs to maintain EPS before revenue levels collapse?  
Will potential buyers of CSC be deterred by the Federal prosecution related to the alleged Medicaid  fraud in NYC?  

We continue to believe CSC is becoming a shell whose value
is being lost by being continually hollowed out in the quest for short term profits. 

Investors following the advice of   “financial spreadsheet analysts”; who we believe do not look deeply into the company but just run superficial financial spreadsheets on reported headline results, forecast the CSC share price as heading towards a range of $72 to $75. They could take a real beating.

Same Old Story - Same Old Song