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Is Computer Sciences Corporation (CSC) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Computer Sciences Corporation (NYSE:CSC) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell Computer Sciences Corporation (NYSE:CSC)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: Are profits, margins, and free cash flow all increasing?
2). Valuation: Is share price growing in line with earnings per share?
3). Opportunities: Is return on equity increasing while debt to equity declines?
4). Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s look at CSC’s key statistics:

CSC Total Return Price Chart

CSC Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% (9.3%) Fail
Improving profit margin 43.2% Pass
Free cash flow growth > Net income growth (46.4%) vs. 29.9% Fail
Improving EPS 30.1% Pass
Stock growth (+ 15%) < EPS growth 24% vs. 30.1% Pass

Source: YCharts.
*Period begins at end of Q2 2010.

CSC Return on Equity Chart

CSC Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 174.8% Pass
Declining debt to equity 48.9% Fail
Dividend growth > 25% 33.3% Pass
Free cash flow payout ratio < 50% 26.2% Pass

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we’re going

Computer Sciences Corporation (NYSE:CSC) comes through with flying colors, earning six out of nine possible passing grades. The largest concern here is CSC’s declining revenue, as fiscal belt-tightening and corporate streamlining can only take a business so far in the profitability department. This is a strong performance, but it could be stronger in a few places. Can CSC keep up its progress in the future? Let’s dig a little deeper to find out.

CSC’s shares soared after reporting its latest quarterly results, as most analysts were expecting the sequester to crimp government spending. However, government contractors are clearly not created equal — the U.S. Department of Defense has awarded a number of IT services contracts to Computer Sciences Corporation (NYSE:CSC), which will provide sustainable revenue for at least the next few quarters. CSC bagged a $41.1 million option contract to deliver IT support services to a Naval technology center, which is expected to run until 2015. In addition, CSC will also provide enterprise business systems integration services to the Marine Corps with the support of the U.S. Navy Technology Services Organization. This $28.9 million deal is expected to wrap up by August 2014.

NASA has also awarded a $62 million contract to manage the NASA Advanced Supercomputing Division at Ames for the next year. Computer Sciences Corporation (NYSE:CSC) subsidiary DynPort Vaccine also gained a $157.3 million contract to formulate a “prophylactic and medical countermeasure to forbid the effects of organophosphorus nerve agents” — in other words, a nerve-gas defense. More such deals might be forthcoming in light of the recent Syrian chemical-weapons brouhaha.

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