Truth in Media Global Watch Bulletins

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TiM GW Bulletin 99/11-3

Nov. 12, 1999

Analysis of Computer Sciences Corp.'s Latest Business Results

No Buybacks, No Kickbacks

Wall Street Basically Shrugs Off CSC's Stellar Business Performance


WESTERN AUSTRALIA, Nov. 12 - Computer Sciences Corp. (CSC) is looking more and more like the Rodney Dangerfield of the IT services leaders. It's producing excellent business results but getting no respect on Wall Street.

For the first six months of its FY00 (which ends March 31), for example, CSC's net earnings were up 22%. Its global commercial revenues rose by 21%, led by a 26% jump in U.S. commercial business. Fueled by the acquisition of the Singapore-based CSA Holdings, and a solid increase from CSC Australia, the company's Asia/Pacific revenues practically exploded, recording an 80% surge since a year ago. And even the U.S. government business increased modestly (2%), despite an expected drop (-3%) in the Department of Defense revenues (CSC is one of the Pentagon's top suppliers - see "Death Merchants'" View: "War Is Great; Peace Sucks; Long Live NATO!" - S99-83, Day 57, Item 1, May 19). This puts CSC on track to a $9 billion FY00 revenue total - a 22% compound annual growth in the 1990s.

Yet, Wall Street basically shrugged off such a stellar performance. CSC's stock is down 1% since the day following its disclosure of the above results (Oct. 26).

The reason? God only knows for sure when it comes to such a fickle being as the stockmarket. But there is at least one thing which sets CSC apart from its bigger rivals, such as IBM and EDS. CSC has stuck to its business fundamentals, instead of trying to get Wall Street kickbacks through stock buybacks. CSC's leaders seem to believe that substance will ultimately prevail over fluff (see our "fluff ratios" - market capitalization over equity). Which, of course, is an unwelcome tune on a Street of Fluff called Wall.

If "the way to a man's heart is through his stomach," as an old Eastern European saw goes, then the equivalent Corporate America's truism nowadays seems to be "The way to higher share prices is through stock buybacks." No buybacks, no kickbacks (meaning Wall Street analysts' recommendations) - is clearly the message which today's perverted stockmarket keeps emitting, time and time again.

Which, by the way, is not much different than the Old Continent truism. Stock buybacks may deplete the shareholders' cash, but they do put more food on Wall Street tables. Even twice(!), if the appeaser-courtier borrows money (from Wall Street, of course), to buy back its shares, such as EDS has done, for example (see Annex Bulletin 99-33, Oct. 30, 1999).

Which is like taking out a mortgage on a house which you already fully own, and then bidding against yourself and other would-be buyers in the hope of raising the price.

But fret not. Common sense was never high on the list of Eastern European lovers, either. For, there are still some "un-emancipated" women cooking delicious home made meals for their "politically incorrect" male lovers, rather than ordering out at some multinational fast food source of intestinal pollution - the recommended Wall Street alternative.

No wonder, therefore, that Wall Street is punishing its disobedient subjects - like the good, old CSC, one of the most shining examples of how even big companies can reinvent themselves in a hurry (see the chart). Which only goes to prove that the Street of Fluff is no longer about business. Or excellence. It's an electronic casino for men and women in pin-striped suits, who treat blue chip companies, like CSC, the way blue collar gamblers handle the gambling chips at Las Vegas casinos. As disposables.

Of course, you've heard us say that, or something like that, on a number of occasions before in the last three to four years - ever since the Era of Greed was ushered on a street called Wall. But the latest CSC and EDS results provide a striking case in point.

EDS's third quarter earnings, for example, were down 19%. They were down 39% for the first nine months. Revenues were up a meager 8.3%, the slowest pace this year (up 9.4% for the first nine months). But its new contract sales soared (up 87% over the year ago quarter).

More importantly, however, EDS has revealed that it had started a modest stock buyback program (by corporate America's standards - see Annex Bulletin 99-33, Oct. 30, 1999). And that it had repurchased just over $1 billion-worth of its shares to date.

Boom! The EDS stock shot up more than five points following its earnings announcement on Oct. 28. And has kept on rising since. Since January 1999, EDS's shares are up 25%, with most of the gains having been made since the October stock buyback disclosure (see the chart).

Now, let's take a look at the corresponding CSC stock price chart. Here's a company whose earnings were up 22%, as you saw earlier; whose commercial revenues had risen over 21% during the same period. And which had closed $5.3 billion in new contracts during that six month-period, more than the $5.1 billion total (excluding the IRS deal) announced in its entire fiscal year 1999!

Furthermore, CSC remained loyal to its loyal employees. It never laid anyone off. In fact, it has hired so far about 4,000 people this year. Yet CSC's SG&A expense-to-revenue(1) ratio is 8.7% (vs. EDS's of 9.6%), one benefit of a business strategy which focuses on outselling rather than outslashing the competition.

So what did the stockmarket think of all this? The CSC stock is down 7% for the year; EDS's is up 25% during the same period (see the above chart). Go figure…

"And as for fortune, and as for fame," as go the verses of the "Don't Cry for Me, Argentina" score from the hit musical, "Evita" (Peron), "I never invited them in. Though it seemed to the world they were all I desired, they are illusions; they are not the solutions they promised to be. The answer was here all the time. I love you and hope you love me. Don't cry for me Argentina."

Country vs. Fame… Substance vs. Fluff. The latter are "here today, gone tomorrow." The former will remain, despite the assault by Wall Street's business perverts.

Chairmen and CEOs of American corporations should listen to Evita's message. And then perhaps think about what their "Plan B" is going to be when fame (i.e., the Wall Street "fluff") runs out. As it started to run out last month in IBM's case, for example (see "Big Blue Sings Y2K Blues," Annex Bulletin 99-32, Oct. 21, 1999). Hopefully it will be something other than the obvious - looking for a place to hide from angry general shareholders.


FOOTNOTE (1): A word of caution is in order here. CSC and EDS may be treating the SG&A expenses differently. CSC has a separate account called "Depreciation and Amortization," which represented 5.7% of its revenues in 1H00. EDS has no such expense account. Its depreciation and amortization expenses are presumably merged with other costs and expenses.

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