Computer Sciences (CSC): Expectations Too Low For The HPE Business - Jefferies

September 19, 2016 7:18 AM EDT
Get Alerts CSC Hot Sheet
Price: $55.41 -0.77%

Rating Summary:
    6 Buy, 13 Hold, 0 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 17 | Down: 27 | New: 7
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Jefferies analyst, Jason Kupferberg, reiterated his Buy rating on shares of Computer Sciences (NYSE: CSC) and believes the HPE deal accretion is "nowhere near fully captured in shares" and that a combination of upcoming deal-related filings and an Analyst Day can be positive catalysts in C4Q and C1Q.

The analyst believes that the HPE ES deal can be roughly 100% accretive to EPS, and shares are significantly undervalued. In Exhibit 1, the analyst reiterates his base case analysis for the CSC/HPE ES merger, which suggests the transaction could be 102% accretive to year 1 Newco EPS. He notes this base case assumes a 5% revenue decline for the Newco, and no upside to CSC's initial gross cost synergy targets ($1B in year 1, growing to $1.5B in year 2). The analyst believes this could be beatable even on a net basis (after reinvestment) based on management's track record. If the year 1 Newco EPS estimate of $6.71 proves correct, shares of CSC are trading at just 7.2x, which he views as significantly undervalued.

HPE is expected to file a Form 10 with the SEC not too long after its FY end of 10/31, and this will include carved out financials for the Enterprise Services business which HPE has agreed to merge with CSC. Around the same time, CSC should file an S-4, providing historical pro forma financials for the combined Newco.

No change to the price target of $63 based on the value of core CSC (11x C17 EPS of $3.22), plus the pro forma value of HPE ES (8x projected year 1 EPS accretion of $3.38).

For an analyst ratings summary and ratings history on Computer Sciences click here. For more ratings news on Computer Sciences click here.

Shares of Computer Sciences closed at $48.89 yesterday.

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