Description
EDS provides data processing services, and IT functions over long-term contracts accounted for as per-centage of completion. Like most cheap stocks today, this idea has its share of hair on it.
chg.in sales y/y= (0.2%)
sales= $21.502B
OPM= 8.8%
net margin= 5.2%
ROA= 6.3%
ROE= 16.6%
TEV/LTM EBITDA= 3.2
TD/EBITDA= 1.5
EBITDA/int.= 11.0
(EBITDA-capX)/int.= 7.7
EBIT/int.= 4.8
CFO-capX= $1.273B
CFO-CFI= $1.249B
Debt putable on 10/2003= $772M
2003PER= 8.4
2004PER= 7.0
P/BV= 1.0
DIV= 4.1%
P/SALES= 0.3
P/FCF=6.9
2003E= $1.757(vs.co.guidance $1.80-$2.00)
Several shadows hang over EDS:
1. CEO Dick Brown: Arriving in 1999, he aggressively fired employees, and aggressively pursued market share. Critics allege that he signed various long-term contracts at unprofitable rates. Supporters allege that he signed contracts that were, and remain, FCF negative. A year ago, he advised investors "no worries on the horizon", only to significantly dissapoint. His crediblility remains low, and it appears that analysts who were burned are "adversely selecting" the stock. When he offers guidence, they haircut his estimates.
2. NMCI contract: EDS signed a large contract with the Navy-Marine Corp. that is substantially FCF negative (currently -$860M). Together with a UK government contract, toal unbilled revenue is $1.6B. EDS has announced additional progess on the contract and claims that it will be "seated" by the end of 2003.(Currently about half way there.)
3. Bankruptcy of WCOM and US Air: Unclear how great an impact these will have (WCOM deal was largely a barter). Some have est. that US Air would impact EPS by -$0.02.
4. SEC inquiry: Initiated to look-into management's "misleading" investors with its guidence. One investors is reported to have purchased one million shares at 60 after Dick's "no worries" guidence. Mitigating the possible fallout from this issue, the Co. bought $254M of its own stock in the sepQTR (If stupidity were a crime, these guys would be in Attica -- but so would I.) Under the "one cock roach theory" (i.e. there is never just one), the SEC could uncover other issues.
If the hair is removed from this dog, it should trade in line with its peers, suggesting at least a double from here. Downside will be determined by FCF, which is needed to retire cvts. and about $2.0B in 2004. A recent downgrade (2 levels), should preclude access to the cp market.
Catalyst
1. CEO Brown removed. Distinctly unpopular internally, and widely distrusted by analysts, investors would claim greater transparency.
2. Hostile bid. Highly unlikely.