Federal business is likely to remain a strong growth engine.
As my dedicated (foolhardy?) readers know, I spend most of the first month after the end of every quarter listening to company-earnings conference calls, one after the other. Because this is the year-end quarter, the information tends to be more complete than it is the rest of the year and can give some year-over-year as well as quarter-over-quarter trends. I wish I had better news, but I doubt anyone feels rosy going into the first quarter.
IT spending is being deferred until the pounding of the war drums ceases. Most corporate spending has come to a complete standstill. IT-related companies are already ratcheting down expectations for the upcoming quarter, though some have stated that if a war with Iraq is over quickly, they still expect to make their full-year financial targets with a back-end-loaded business model.
We already got the bad news from Applied Material Technologies Inc. and Cisco Systems Inc. regarding their forward outlook. But what about IT companies that aren't at the forefront of investors' minds? Computer Sciences Corp. (CSC--NYSE), an IT services and outsourcing company, just reported earnings per share of 61 cents for its fiscal third quarter of 2003, ending Dec. 27, a penny ahead of what analysts expected. Unfortunately, it did this on declining revenue of-3.5% year over year, which means that all of the upside was driven by cost reduction. In other words, this trend isn't sustainable for long if revenue doesn't pick up. The company also lowered its upcoming quarter earnings forecast by about 5%--not exactly positive news for investors.
This is especially true because CSC has some very strong markets, such as the federal government. The company's third-quarter revenue of $2.8 billion included sales to the federal government of $790 million, 28% of the total. That's growth of 7.2% year over year, which actually was lower than the prior three quarters. With almost $24 billion in government projects to be awarded over the next few years, this is likely to remain a strong growth engine for CSC. Meanwhile, civil-agency revenue increased by almost 18% to $325 million. The good news from the federal business wasn't enough to offset the bad news from global commercial services, which accounts for 72% of total revenue. CSC's revenue declined for this segment by 7.1% year over year. This would have been lower except currency benefits added almost 4%.
In times of trouble, good companies get tightfisted. CSC, despite the revenue decline, increased operating margins 100 basis points year over year to 6.5%. With Wall Street analysts predicting earnings of $2.55 per share for fiscal 2003 and roughly $2.85 for fiscal 2004, the pricing of CSC at around $32 today represents a forward price-per-earnings multiple of 11.2 times fiscal 2004 earnings per share. This multiple is at the low end of its historical price-per-earnings valuation range, but the company's outlook has rarely been so weak. Management is warning of lower earnings but is still claiming high single-digit revenue growth for fiscal 2004, which may be optimistic. And it still has a pending acquisition (DynCorp) to assimilate. Increased business uncertainty reduces the share-price levels at which investors are comfortable stepping in. CSC is no exception.
William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at firstname.lastname@example.org.
To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.
5 Top Federal Initiatives For 2015As InformationWeek Government readers were busy firming up their fiscal year 2015 budgets, we asked them to rate more than 30 IT initiatives in terms of importance and current leadership focus. No surprise, among more than 30 options, security is No. 1. After that, things get less predictable.
Top IT Trends to Watch in Financial ServicesIT pros at banks, investment houses, insurance companies, and other financial services organizations are focused on a range of issues, from peer-to-peer lending to cybersecurity to performance, agility, and compliance. It all matters.
Join us for a roundup of the top stories on InformationWeek.com for the week of September 18, 2016. We'll be talking with the InformationWeek.com editors and correspondents who brought you the top stories of the week to get the "story behind the story."