Morgan Stanley Report today, as a result of DXC's spin off of PRSP. It's a mess copying/pasting. Basically MS has DXC as being Overweighed, Attractive, with a price target of $101.00 [26% potential gain as of today]"
Brian.Essex@morganstanley.com
Thomas.Robb@morganstanley.com
MORGAN STANLEY & CO. LLC
Brian Essex, CFA
EQUITY ANALYST
+1 212 296-5569
Thomas Robb
RESEARCH ASSOCIATE
+1 212 761-4907
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IT Services
/ United States of America
Stock Rating
Overweight
Industry View
Attractive
Price target
$101.00
Shr price, close (May 31, 2018)
$92.11
Mkt cap, curr (mm)
$26,279
52-Week Range
$107.83-73.51
QUARTERLY MODELWARE EPS ($)
2019e
2019e
2019e
2019e
2020e
2020e
2020e
2020e
Quarter
Quarter
2018
2018
Prior
Prior
Current
Current
Prior
Prior
Current
Current
Q1
1.59
-
1.90
-
2.17
Q2
1.93
-
2.01
-
2.27
Q3
2.15
-
2.07
-
2.38
Q4
2.28
-
2.15
-
2.49
e = Morgan Stanley Research estimates
Relevant recent reports:
DXC Sell-off Looks Overdone
(May 30, 2018)
Targeting Growth Ahead
(May 25,2018)
Stock Rating
Overweight
Industry View
Attractive
Price Target
$101.00
DXC Technology Company
DXC Technology Company
Adjusting Price Target For Spin
DXC's spin of USPS is effective today and we are adjusting our
price target to reflect the value of the Commercial business
that remains. With a model that already reflected the spin, we
are not changing
estimates or value attributed to the
remaining Commercial business. Reiterate Overweight.
Removing Public Services from valuation.
The spin of DXC's Public Services
business is now complete and buyers of DXC no longer have rights to receive
shares of PRSP effective today. As such, we are adjusting our price target for
DXC to remove the value of PRSP previously included. Our sum of the parts
analysis had valued the previous consolidated DXC business at $114 with a value
of Commercial at $101 per share and PRSP at $13 per share. As we adjust our
price target to reflect the stand alone Commercial business that DXC
shareholders are entitled to today, our price target for DXC moves from $114 to
$101 accordingly (
Exhibit 1
). We are reiterating our Overweight rating and are not
changing our estimates, which had already been adjusted to exclude Public
Services. A $79.96 closing price of DXC's when issued stock (DXC-WI)
yesterday
represents the theoretical price that DXC stock should have been
without rights
to PRSP. This implies an 8.9x P/E using our stand alone Commercial forecast for
CY19, a meaningful discount to the peer group. We believe the multiple should
re-rate higher with execution.
The Commercial business remains with a simpler story.
Now that the spin is
complete, DXC's Commercial business remains. This business consists of Global
Business Services (GBS) and Global Infrastructure Services (GIS) which we
believe will be slightly easier for investors to digest. With the growth outlook for
Commercial improving, we also see meaningful room for margin expansion
remaining. Although the company is spending a larger portion of its cost savings
in FY19 to catch up with spending objectives outlined during its last Analyst Day,
we believe cost savings will continue into FY20 considering a relatively low rate
of cost savings we saw attributable to USPS prior to the spin ($200mm exit run
rate). Meanwhile, we expect leverage of approximately 1.0x for DXC after the
spin with a $984mm payment expected from PRSP and multiple levers to drive
upside to numbers.
What's next?
We anticipate the next catalysts will be earnings next Q and an
Analyst Day expected this fall. While the earnings call may provide an update
around revenue performance and margin expansion for FY19, we will need to
wait until the Analyst Day for an update on medium term guidance for the
company without the Public Services business. We anticipate this will include an
DXC Technology Company
( DXC.N, DXC US )
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result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of
Morgan Stanley Research. Investors should consider
Morgan Stanley Research as only a single factor in making
their investment decision.
For analyst certification and other important disclosures,
refer to the Disclosure Section, located at the end of this
report.
1
June 1, 2018 04:01 AM GMT
update to the company's cost savings outlook for the next several years,
adjusted for the spin-off of USPS.
Estimates and price target for RemainCo unchanged.
Our model for DXC
remains unchanged as we had adjusted our forecast to exclude the Public
Services business (USPS) after the company reported its 4Q'18 earnings results
last week. We continue to value the business based on EPS which we believe is
appropriate considering estimated low level of leverage post-spin. With a better
growth outlook ahead, we believe the stock
can support an 11x multiple on FY20
estimates (March year end) of $9.30. This drives a $101 price target for stand
alone DXC implying 26% upside to DXC-WI. |
