EDS, news from Dallas
<<EDS shares continue to tumble
Stock punished after warning on revenue; ratings downgraded
06/10/2000
By Leah Beth Ward / The Dallas Morning News
Investors slammed shares of Electronic Data Systems Corp. on Friday after a warning from the company that second-quarter revenue would be softer than anticipated.
The stock of Plano-based EDS was off more than 25 percent in New York Stock Exchange trading as analysts weighed in on the news - released after the market's close the day before - by adjusting their ratings downward.
The company said second-quarter revenue would be closer to 3 percent compared with previous expectations of about 7 percent. It did not signal any change in earnings for the second half of the year or the full year.
EDS officials said the softer revenue forecast didn't warrant the scale of the rout on Wall Street. "We definitely think there was an overreaction," spokesman Reed Byrum said Friday.
The stock had skidded 8.5 percent Thursday after Merrill Lynch downgraded the stock. Shares closed Friday at $43, down $14.81.
Though the computer-services company signed a record number of new outsourcing contracts in the first half of the year, some of those agreements were slower to ramp up in May than expected, EDS officials said.
Also dampening growth have been unfavorable currency fluctuations and a reorganization of the sales force, which somewhat slowed momentum. "The revenue is out there. It's just a matter of bringing it in," Mr. Byrum said.
Gregory Gould, who follows EDS for Goldman, Sachs & Co., said management told him growth would slow in the third quarter to the mid-single digits, or half of his previous estimate.
For the fourth quarter, Mr. Gould said, the company guided him toward 10 percent to 12 percent growth compared with his previous estimate of 15 percent.
EDS' caution to Wall Street was "disappointing," Mr. Gould said in remarks issued Friday, because it "will cause investors to question the turnaround and is particularly disappointing given the record amount of new business recently won."
Still, he said, he does not think the slowdown amounts to a fundamental problem with the company's strategy. He also said cost reductions implemented last year are ahead of plan and amount to an "ample cushion" for revving up revenues and widening the operating margin.
EDS is into the second year of a turnaround launched by chairman and chief executive Richard H. "Dick" Brown. The effort will amount to savings of about $1 billion.
Last April, 5,200 jobs were eliminated and about 3,000 people accepted early retirement packages. Mr. Brown also reshuffled managers and executives.
Mr. Byrum said EDS has posted five record quarters in contract signings and is on target to post "a strong second half."
Merrill Lynch analyst Stephen McClellan lowered his earnings estimates for 2001, however, in part because a megacontract with WorldCom Inc., formerly MCI WorldCom, is not generating sales as quickly as he had thought.
Under the agreement, EDS is to receive $6.4 billion to run WorldCom's computer systems while the telecommunications company would receive $6 billion for supplying EDS with phone services.
Mr. McClellan revised his 2001 earnings estimate to $2.70 a share compared with $2.80. He also lowered his target price for the stock to $81 in the next 12 months instead of a loftier $90 a share. Merrill Lynch's rating on EDS fell to near-term "accumulate" from near-term "buy." The brokerage continues to recommend the shares as a long-term "buy."
Mr. Gould's rating went to "market outperformer," removing EDS from Goldman's recommended list. A third analyst, David Togut of Morgan Stanley Dean Witter, lowered the stock to "outperform" from "strong buy." His 12-month price target for the stock is $75 a share, down from $90.
EDS is the second-largest computer services company in the world after IBM Global Services. Mr. Brown said last month his goal is to take EDS to the No. 1 position.
EDS reported revenues of $18.5 billion in 1999. >>
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