It should be easy to turn a handsome profit selling consulting services. Set up a workforce of knowledgeable IT experts, market your services at reasonable yet lucrative fees, then sit back and let the high-margin sales start rolling in. IBM (NYSE: IBM) is the master of this model; Hewlett-Packard (NYSE: HPQ) spent $12 billion to leap into this market by acquiring EDS; and Infosys (Nasdaq: INFY) and Accenture (NYSE: ACN) rely entirely on this attractive business model.
So how come Computer Services (NYSE: CSC) is failing at this simple plan?
The company just reported a measly 1% year-over-year revenue improvement, to $3.94 billion. Earnings did better, rising from $0.85 per share to $0.91 per share. The trouble is the margins: Big Blue racked up a 19.4% profit-before-taxes margin in the last quarter, while CSC only managed 5.4%.
I wish I could call this a turnaround story, but it's only a turnaround if you were heading downward to begin with. Instead, CSC has been stuck in neutral for years, reporting paltry profit margins and anemic growth even when the rest of the industry had good numbers to show.
The stock looks cheap from a price-to-earnings standpoint (trading at 7.8 times 2011 expected earnings), but then again, you're paying these low, low prices for one of the poorer performers in a generally successful industry. I don't expect the shares to jump into IBM-level earnings ratios anytime soon, and neither should you. Computer Sciences just doesn't deserve it.
What is Anders missing in his analysis that would make CSC the four-star CAPS stock that it is? Share your insights in the comments below.
