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CSC falls on Lehman downgrade

Computer Science Corp fell over 8 percent Tuesday after Lehman Brothers lowered its rating on the stock.

Shares fell 5 3/4 to 63 after Lehman analyst Karl Keirstead cut CSC shares to "outperform" from "buy" based on weakening overall demand for IT services and software. CSC provides IT services for large organizations.

After several preannouncements from IT services firms and the recent demand slowdown identified by Cap Gemini, Policy Management Systems and Sungard Data, Keirstead believes CSC may suffer from an industrywide slowdown.

Previous CSC ratings were based on a belief that the computer services company's long-term contracts and large government exposure would insulate it from trends affecting the rest of the IT services industry, Keirstead wrote in a report.

Keirstead now sees a slacking of demand for software programming and consulting skills related to ERP implementation, Y2K code conversion, legacy software maintenance and enhancements and custom software development, Keirstead said.

Earnings estimates for 26 of the 39 public IT services firms have been chopped recently. While much of the demand slowdown is Y2K-related, other forces, such as a demand shift to Internet and network-based applications are also to blame.

The profit warning from Cap Gemini, Europe's largest independent IT services firm was analysts' first clue something was wrong with CSC, which derives about 35 percent of its revenues from Europe. Policy Management Systems (NYSE: PMS) and Sungard Data (NYSE: SDS) also warned of slower-than-expected software license sales yesterday.

Keirstead said he remains comfortable that CSC will meet the Street's second quarter revenue estimates of 53 to 55 cents a share.