In a recent report, analysts at JP Morgan gave its updated take on the outlook for Computer Sciences Corporation CSC 7.19% in light of a recent story by Bloomberg that the company has been in talks to sell its business to private equity firms. While rumors of a potential buyout have dated all the way back to 2005, analysts believe the company has never been in a better position as a buyout target than it is right now.

Sum Of The Parts Valuation

In recent years, Computer Sciences has grown its commercial business to the point where analysts now believe the unit could draw M&A interest on its own. While analysts see potential for slight margin expansion as a consolidated entity, they see potential for a 26 percent increase in the company’s market cap if the commercial business and the federal unit are valued as separate entities.

Analysts believe that the company’s current margin and cash flow potential is limited by its Global Infrastructure Services (GIS) segment. The GIS segment accounts for a large portion of the company’s earnings, but operates with much lower margins than the rest of the businesses.

Unlocking Value

JP Morgan analysts believe that separating the commercial and federal businesses could be the key to unlocking the full value of CSC’s businesses. “Although CSC is already focusing on asset-light deals, we believe the transition could accelerate if taken private (even as part of a larger company) where there won’t be as much investor pressure to grow commercial revenue,” analysts explain in the report.

JP Morgan models indicate that as little as a 2 percent improvement in capital intensity could unlock $150 million in incremental free cash flow for Computer Sciences.

What Does It Mean For Shareholders?

The stock traded up more than 7 percent to $71.74 on Monday on rumors of a potential buyout. JP Morgan has a Neutral rating on Computer Sciences and a $65.00 price target for the consolidated company. However, analysts see more upside for current shareholders depending on the structure of a potential buyout.

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