THREAD -- REASON FOR BUYING DEC--Dow Jones Newswires -- April 2, 1998
Computer Svcs Firms Seen Posting Strong 1Q Earns Growth
By Sean Davis
NEW YORK (Dow Jones)--The companies that install and maintain corporate computer systems are expected to post strong earnings growth for the three months ended March 31.
This should help the valuations of these stocks, which already are on the rise as investors fleeing more volatile tech groupings turn to them as havens.
Computer-services firms are on a roll in large measure because of the shift by corporations to client-server systems and because of the work required in advance of the year 2000, when many computer systems will crash unless updated to recognize dates with years expressed in four digits.
Another reason for optimism is the companies' ability to pass on higher labor costs to clients, analysts say.
"Customers are in desperate need of services," said analyst Edward S. Caso of BT Alex. Brown Inc. "They have become price insensitive."
Computer-services companies got added attention in the first quarter of 1998 due to two high-profile takeover bids.
First, Compaq Computer Corp. (CPQ) agreed to buy Digital Equipment Corp. (DEC) in a merger seen propelled by Compaq's desire to build a first-class service operation.
Then, software maker Computer Associates International Inc. (CA) launched a failed hostile takeover bid for Computer Sciences Corp. (CSC), a leading computer services provider.
In fending off the Computer Associates takeover attempt, Computer Sciences gave Wall Street a clear view of what it expects to earn for the next two years, analyst Hugh Shytle of Cowen & Co. said. The company's earnings report for the three months ended March 31, its fiscal fourth quarter, shouldn't contain many surprises, he said.
Shytle sees Computer Sciences, of El Segundo, Calif., earning 58 cents a share on revenues of $1.84 billion in the fourth quarter. A year ago, the company earned 48 cents a share on revenues of $1.53 billion.
"It's now incumbent upon the company to help (investors) understand the confidence," Shytle said. In particular, Wall Street is looking for a more proactive investor relations effort from the company, he said.
For Electronic Data Systems Corp. (EDS), of Plano, Texas, guidance has been harder to come by, according to Shytle, although that is understandable given the changes taking place at the company since its spinoff from General Motors Corp. (GM) in 1996.
Shytle expects EDS to post net income of 45 cents a share on revenues of $3.86 billion for the first quarter ended March 31. A year ago, EDS earned 40 cents a share on revenues of $3.59 billion.
One thing EDS needs to show investors is the progress it is making in cutting costs. Also of interest to Wall Street is when EDS will begin booking profits from two large contracts currently underway. Shytle expects EDS to start making money on the contracts - one with BellSouth Corp. (BLS), the other with Commonwealth Bank of Australia - later in 1998.
The outlook for smaller computer-services firms also is strong. This group of fast-growing companies has taken advantage of the demand explosion to expand offerings and move into higher-margin business, analysts say.
Keane Inc. (KEA) of Boston should earn 23 cents a share on revenues of $205 million in the first quarter, BT Alex. Brown's Caso said. A year ago, Keane earned 15 cents a share on revenues of $141.1 million.
Keane's move to the higher-margin "solutions" business - providing management skills, methodologies and software tools as well as supplemental staffers - is paying off, Caso said.
"When you have strong topline growth and expanding margins, that's a scenario where earnings can surprise on the upside," Caso said.
Cambridge Technology Partners Inc. (CATP) is another computer services company poised to show continued top and bottom-line growth, Caso said.
Caso sees the firm, based in Cambridge, Mass., earning 20 cents a share on revenues of $122 million. Including results from companies acquired in the last year, Cambridge earned 14 cents a share on revenues of $82.2 million in the year-ago first quarter, according to Caso. As reported, Cambridge had net income of 13 cents a share on revenues of $71.1 million in the year-ago period.
Cambridge's strength is its rapid fixed-price systems integration, Caso said. The company is a model for many smaller private firms, he said.
Ciber Inc. (CBR) of Englewood, Colo., could beat Wall Street expectations, analyst Thatcher Thompson of Merrill Lynch Global Securities said.
Thompson expects Ciber to post net income of 18 cents a share on revenues of $121 million for the three months ended March 31, its fiscal third quarter. A year ago, Ciber had net income of 12 cents on revenues of $69.7 million.
"These guys have been adding a lot of business in the higher-level consulting type stuff," Thompson said. "You've seen their gross margins expanding."
Ciber should be able to hold its selling, general and administrative costs down relative to sales, Thompson said. He expects the company's gross margin to widen to 32.7% from 30.7% a year ago.
Computer Horizons Corp. (CHRZ) of Mountain Lakes, N.J., could show continued gross margin growth in the first quarter, according to analyst Brian Maimone of Furman Selz LLC. The company had a gross margin of 34.1% in the fourth quarter, its sixth straight period of expansion, and the first quarter should at least match that, Maimone said.
Maimone sees Computer Horizons earning 27 cents a share on revenues of $99 million, up from net income of 16 cents on revenues of $69.7 million a year ago.
American Management Systems Inc. (AMSY) of Fairfax, Va., faces the challenge of restoring growth to its telecommunications group, according to Maimone.
"They had some problem projects last year, particularly in the telecom area, that have hurt their momentum," Maimone said.
He sees American Management posting first quarter net income of 20 cents a share on revenues of $223 million. A year ago, the company earned 14 cents a share on revenues of $196.3 million.
Despite slower earnings growth than the rest of the group, American Management rose to a year-high share price of 30 last month. The stock recently traded at 27 7/8. Maimone says the expected consolidation of the computer-services sector is helping American Management. "There is a significant takeover premium in the share price," he said.
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