Computer Sciences Corporation (NYSE:CSC)
has long been a favorite holding of David Einhorn, whose confidence in the company's turnaround is starting to pay off. Already having doubled in market price since Einhorn's investment, the company still trades for just 7.5 times trailing earnings.
Meanwhile, Computer Sciences continues its efforts to boost margins, which have only recently recovered to the level experienced before the company took a big bath in 2012.
In fact, the company is already exceeding Einhorn's expectations; the activist investor stated at the time of his purchase that he expected the company to eventually earn $4 to $5 per share. Over the last four quarters, the company earned over $6 per share. If the company can maintain this level of profitability, the stock -- now trading at around $45 per share -- is a bargain.
No moat, but a decent business
Computer Sciences Corporation (NYSE:CSC
) does not have a durable competitive advantage that will enable it to earn outsized profits for decades into the future. However, the company currently has a significant advantage in expertise and IP in its core markets, in addition to a long history of good relations with government customers. Although the company's reliance on government spending could sink the company if austerity measures are imposed by Congress, such a scenario is unlikely to occur in the near future.
Instead, Computer Sciences' main obstacle comes in the form of Cognizant Technology Solutions Corp (NASDAQ:CTSH)
and other competitors. Although Cognizant is not as reliant on government contracts as Computer Sciences -- Cognizant is focused on growth in Western Europe -- it poaches more than its fair share of highly-trained employees from Computer Sciences. As the battle for qualified employees intensifies, Computer Sciences Corporation (NYSE:CSC
) and Cognizant will continue to grow their backlogs and employee salaries will continue to rise.
However, Cognizant's raid on employees is not likely to come to an end any time soon. As a latecomer to the fast-growing European market, the company has some catching up to do; it is aggressively expanding in the region. In addition, the company is also having trouble filling employment vacancies in its U.S. business; the company relies on American personnel to recruit and retain American customers. These personnel concerns make a long battle for employees a likely scenario.
Despite Computer Sciences' deep relationships with U.S. state and federal governments, the company earns significantly lower returns on invested capital than Cognizant.