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Cost reductions and share buybacks should generate higher EPS.
Computer Sciences Corp (CSC) is a large IT service provider. At 43.45, it currently trades at a P/E of 12.6, well below both the industry average (20.5) and its own 5 year average (21.1). I have followed it for several years - it was in S&P's Platinum Portfolio and I decided to track it due to the indications of good quality. They have been restructuring over the past year or more, moving operations to lower cost areas. A large amount of their business is long term contracts, so if costs can be reduced profits should increase. This is another 7% a year growth story, it gets no respect but adds up over time. Share counts have decreased in recent years due to buyback activity.
Cash flow is interesting, CSC trades at 5 X Cash Flow, vs. an industry average of 13. I compute a statistic, Earnings as a % of Cash FLow, in this case it seems to run somewhere around 25-40% year after year - most companies its more like 70-80%. Always good to receive cash but not report earnings, as it reduces taxes and the cash can be put to good use.
Taking all of this together, and projecting based on historical average margins and growth, which may be conservative, I get EPS 3.80 x P/E 16 = 60 per share within one year. I recently added this to my SLO portfolio, a small position, which I can add to as circustances permit.
Tom
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Comments (1)
Great analysis.
Posted by Uncle John | March 6, 2008 4:35 AM