Analyst’s Accounting Questions Hurt CSC Stock

Computer Sciences Corp. stock fell 12% Wednesday after a research firm analyst faulted the technology services company for insufficient financial disclosures and questioned how it has managed to cut general expenses even as its payroll has grown.

Sanford C. Bernstein analyst Rod Bourgeois also wrote to clients that after conversations with the El Segundo company’s management, he still didn’t understand why CSC has been treating more costs from outsourcing contracts as assets when the amount of new contracts has been declining.

“It is uncomfortable being unable to understand -- due to insufficient disclosure -- major accounting patterns that have quite significant earnings implications,” Bourgeois wrote.

CSC didn’t respond publicly to the morning report until well after the end of regular trading on the New York Stock Exchange. By then, its stock had fallen $3.89 to $28.52 after dipping below $27 for the first time since October.

The company cited other factors for reduced expenses, including cuts in discretionary spending and the use of subcontractors, and said there hadn’t been any change to its capitalization “policy and pattern.”

Some analysts said the stock market overreacted.

“You can take expense out of selling, general and administrative costs without reducing headcount. You reduce travel, defer bonuses and cut down on perks,” SoundView Technology Group analyst John B. Jones Jr. said.

Jones said Bourgeois missed the fact that CSC moved its reserves for bad debt from general expenses to part of the costs of goods sold, a separate line on the income statement.

And he said that it makes sense for some contracting costs to be capitalized, or treated as an asset, well after the work on a contract has begun. “Timing is a dramatic issue,” said Jones, who rates CSC shares “outperform” and doesn’t own any himself. SoundView does no investment banking with CSC.

Bourgeois said he wasn’t accusing CSC of inflating earnings. But he said investors were sensitive to capitalizing costs and that the company should disclose more information. He rates the shares “market perform.”