Should You Hold Computer Sciences (CSC) Stock for Now?

Zacks Equity Research

At times, it is prudent to retain certain stocks that have enough potential but are weighed down by tough market conditions. Computer Sciences Corporation CSC seems to be one such stock, which investors need to hold on to if they are looking to reap long-term gains. Though the stock faces several headwinds at the moment, these are transitory in nature. There is enough scope for this Zacks Rank #3 (Hold) company to rebound in the long run. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Further, Computer Sciences’ stock price history reveals that the company hasn’t disappointed in a long time. In fact, over the past one year, shares of Computer Sciences have risen 114.4%, outperforming the Zacks Categorized Computer-Services industry, which has showcased an increase of just 38.6%.

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Driving Factors

Computer Sciences posted better-than-expected second-quarter of fiscal 2017 results. Also, second quarter revenues improved year over year.

Computer Sciences’ recent decision to merge itself with Hewlett Packard Enterprise Company’s HPE business, which will be spun off from the parent company, is likely to open new avenues of growth. The deal will combine Computer Sciences’ strength in insurance, healthcare and financial services with Hewlett Packard Enterprise’s expertise in industries like transportation, pharma, technology, media and telecom.

Post the merger, the combined entity will become the world’s second-largest IT services company and generate revenues of approximately $26 billion. Per the deal, shareholders of each of the companies will own about 50% of the combined company. We believe that the merger with HPE’s business will strengthen Computer Sciences’ capabilities, allowing it to become a leading player in the IT services domain.

Computer Sciences is focusing on the cyber business, cloud computing market and Big Data business. A significant portion of the company’s cyber business is contributed by the federal government and, to an extent, the commercial sector. The company mainly focuses on providing backup IT support to federal government departments, and some other companies. Worldwide IT spending is projected to total $3.46 trillion in 2017, a 2.7% increase from $3.38 billion in 2016, as per a recent report from information technology research and advisory firm, Gartner Inc. Computer Sciences is expected to benefit from this growth.

Additionally, the company’s traction in the cloud and partnerships with HCL, AT&T T, VMware VMW and Microsoft are expected to drive growth, going forward. This will in turn increase Computer Sciences’ customer base and help in garnering additional revenues.

Moreover, the stock looks attractive from a valuation perspective. This is because Computer Sciences currently trades at a forward P/E of 22.6x as against the industry group average of 28.7x, which signifies a huge upward potential.

The stock’s long-term earnings per share growth rate is 8% and it carries a Value Score of “B.”

Risks Persist

However, the company will likely face some challenges with regard to the integration of the new businesses and the costs associated with them. Apart from this, increased competition, delay in government’s order renewal process and constricted federal spending are the other concerns.

Our Take

We expect the aforementioned factors to help the company sustain its strong momentum and stay afloat even amid difficult times. Hence, we suggest that investors hold on to the stock as the rest is a wait-and-see story.

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AT&T Inc. (T): Free Stock Analysis Report
Computer Sciences Corporation (CSC): Free Stock Analysis Report
Vmware, Inc. (VMW): Free Stock Analysis Report
Hewlett Packard Enterprise Company (HPE): Free Stock Analysis Report
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