CSRA Down To Strong Sell, Doubt Over NSA &TSA Deal Prevails

On Jun 22, CSRA Inc. (NYSE:CSRA) was downgraded to a Zacks Rank #5 (Strong Sell). Going by the Zacks model, companies carrying a Zacks Rank #5 are likely to underperform the broader market in the next one to three months.

Revenue concentration, budgetary constraints, uncertainty related to significant contract renewals and leveraged balance sheet are major concerns for CSRA.

Why the Downgrade?

We note that the National Security Administration’s (NSA) Groundbreaker program and the Transportation Security Administration’s (TSA) Information Technology Infrastructure program that comprise two crucial government programs (making up about 10% of company revenue) are going up for re-compete this year. Hence, the uncertainty over the renewals of TSA and NSA contracts are potential headwinds to CSRA’s industry leading margins, especially as the competition becomes more intense.

Additionally, the delay in awarding the C4ISR systems contract and slow ramp up of the Office of Personnel Management (OPM) background investigations contract has impacted top-line growth in the last reported quarter. Moreover, we expect sluggishness in award procurement to continue in the near term (over the next two quarters), due to numerous ongoing transitions within the Trump administration.

Furthermore, revenue concentration is a major risk for CSRA. In fiscal 2017, 94% of revenues came from sales to the U.S. federal government either as a prime contractor or subcontractor. Due to this massive dependence, any adverse changes in government’s IT spending budget could mar the top-line growth.

Further, CSRA’s leveraged balance sheet adds to the risk of investing in the company. As of Mar 31, 2017, the company had total debt (including the current portion) of $2.58 billion. Meanwhile, it just had $126 million as cash and cash equivalents as of Mar 31, 2017.

On May 24, 2017, CSRA reported fourth-quarter fiscal 2017 results wherein earnings of 49 cents beat the Zacks Consensus Estimate while revenues of $1.25 billion missed the same. On a year over year basis, revenues fell 3%. Also, revenues for the full fiscal were down 4% year over year to $4.99 billion.

Consequently, the company has been seeing downward estimate revisions. In the last 30 days, the Zacks Consensus Estimate for fiscal 2018 declined 4.4% (9 cents) to $1.95 per share while that for fiscal 2019 dropped 2.3% (5 cents) to $2.13 a share.

We also note that CSRA’s share price movement has been dismal in the past six months. Shares have gained a meager 0.2% compared with the Zacks categorized Computers - IT Services industry’s increase of 11.2%.

Stocks to Consider

Better-ranked stocks in the broader tech space include EPAM Systems, Inc. (NYSE:EPAM) , CoStar Group, Inc. (NASDAQ:CSGP) and MAM Software Group, Inc. (NASDAQ:MAMS) . EPAM Systems sports a Zacks Rank #1 (Strong Buy), while both CoStar Group and MAM Software Group carry Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the trailing four quarters, EPAM Systems, CoStar Group and MAM Software Group delivered average positive earnings surprises of 3.24%, 11.34% and 92.86% respectively.

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