thestreet.com
EDS Plunges on Derivative Fears
By TSC Staff
09/24/2002 12:19 PM EDT
Updated from 11:52 a.m. EDT
Shares of EDS (EDS:NYSE - news - commentary - research - analysis) spiraled lower Tuesday as the company found itself in a firestorm of speculation that its steadily falling stock price has exposed it to a big derivatives charge.
The company's shares were recently down 34.5% to a 52-week low of $10.82 in extremely heavy trading after Merrill Lynch downgraded the stock to sell from hold, claiming the company's entire 2002 free cash flow could be wiped out by options it wrote on its own shares.
An EDS spokesman wasn't immediately available to comment.
According to Merrill analyst Stephen McClellan, EDS said in a June 30 SEC filing that it had sold put options on 2.5 million shares at an exercise price of $62.90 and engaged in forward purchase contracts for 2.6 million shares at an exercise price of $61.58, for employee incentive plans. Merrill said EDS unwound obligations Friday representing 3.7 million shares at a cash cost of $225 million, which it paid for using commercial paper. That could result in a charge against earnings of up to 21 cents a share.
The company also might have to refinance an $800 million convertible bond, Merrill said in its note.
EDS's shares were pummeled last week, falling from $35.46 to $17.20, when the company said that its free cash flow for 2002 would be just $200 million to $400 million, and that third- and fourth-quarter earnings would both miss estimates. Its 52-week high is $72.45.
Another analyst, Sanford Bernstein's Rod Bourgeois, believes the high-profile nature of that profit warning will lead the Securities and Exchange Commission to open an informal inquiry into EDS's accounting. Bourgeois noted the informal inquiry wouldn't necessarily lead to a formal probe, he said.
A big hit to EDS financial health could hurt its ability to compete for contracts, McClellan said, adding there was also a chance the company could face problems with troubled contracts with WorldCom and US Air. Other problem exposures included Xerox (XRX:NYSE - news - commentary - research - analysis), American Airlines and United Airlines, McClellan said. |
