Sounds like Brandon's frustrated. Consulting utilization rates within EDS units I am familiar with are pushing 80%, which is quite good.
This from William Schaff, Information Week...
EDS Remains A Good Bet -- Investors would be buying into one of the strongest IT integrators in the business
June 20, 2000
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WILLIAM SCHAFF
Poor Electronic Data Systems (EDS-NYSE), the largest publicly traded systems integrator. It just pre-announced a shortfall in revenue for the second quarter. Needless to say, the stock's price quickly nose-dived-from $57.81 on June 8 to $43.88 the next day, a decline of 24%. Actually, the price slide started earlier-from a June 5 peak of $65.50 to the day after the earnings warning, it fell more than 33%. And I thought the arrival of new CEO, Dick Brown, in December 1998 was going to alleviate these unhappy surprises.
The flurry of earnings activity got everyone excited. Here was a company that was looking to get back on track this year after a great financial turnaround in the fourth quarter of last year. Did anything really go wrong, or is it merely a timing issue, as management has stated? The facts are as clear as mud.
Most stock-market analysts predicted revenue would rise at a high single-digit pace, then eventually increase 10% to 15% by year's end. The company now says revenue growth will be in the low single digits for the second quarter, let's say 3% to 4%, and maybe rising to the 8%-to-10% range by year-end.
However, because of a strong second half, management expects revenue growth over the balance of the year to make up most of the second quarter shortfall. With this slight downward revision, revenue will likely be closer to $19.5 billion this year, rather than the expected $20 billion. This is still a big increase over the $18.5 billion it reported last year.
What were the critical problems-or at least the ones we've heard so far-during this quarter? The first issue was sales-force transition. Theoretically, salespeople were given less incentive to increase sales to the client base-such as cross-selling services-and more incentive to bring in new clients. Clearly, when sales staff see the financial incentives come from new client sales, that's where they will spend most of their time and energy.
Most of the issues were domestic and located in the Information Solutions division, EDS's primary outsourcing unit. Management was quick to point out that they were modifying incentives to include cross-selling and current client business.
The second issue came from a major foreign-exchange hit as the dollar strengthened greatly against the euro. Europe represents more than 28% of sales for EDS. Third, revenue hasn't come in as quickly as expected from current contracts. For example, the MCI WorldCom contract-a 10-year deal in which EDS takes over large tracts of MCI WorldCom's IT operations, including the transfer of 12,000 of its employees to EDS-had some startup problems which slowed the revenue flow from the deal. Finally, there are always the miscellaneous items such as divestitures and acquisitions that affect earnings but aren't overly material to ongoing operations.
The positives still include a large backlog of business in the pipeline, estimated to be upward of $60 billion. Multibillion-dollar outsourcing contracts have become commonplace this year, including major wins by EDS as well as its leading rivals such as Computer Sciences and IBM. New contracts are easily on track to beat last year's $25 billion level, with numbers of $28 billion to $29 billion readily obtainable.
I don't expect this healthy industry trend to decline. Some productivity gains within EDS should help expand operating margins from the current 9% levels, which would keep earnings estimates for the year almost unchanged despite the lower revenue predictions. This will come because of better product pricing and cost containment.
Most analysts have recommended steering clear of this stock until the air clears. However, I fully expect the second half to close strongly, prompting those same analysts to start revising their estimates upward.
In addition, investors would be buying into one of the strongest IT integrators in the business. My earnings per share estimate for the second quarter and full year are 53 cents and $2.28, respectively. At the current price of $42, the price-to-earnings multiple is 18.4 times forecasted 2001 earnings. My price target is $55, and that's being pretty conservative. There's nothing wrong with a potential 30% return over the next year with limited downside risk.
William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index. You can reach him at bschaff@bayisle.com.
For a complete listing of our stock index, see p. 148
iweek.com
Copyright c 2000 CMP Media Inc.
By WILLIAM SCHAFF
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