EDS's loss is GM's gain.
[Y2K problems play to EDS's strength: taking on well defined, big
jobs. I believe that EDS shareholders will be very pleasantly
surprised by the profits Y2K will generate for EDS. --''''> ]
EDS shares slump amid fresh concern over margins
By Kieran Murray
DALLAS, May 1 (Reuters) - Electronic Data Systems Corp. (EDS - news)
on Friday took a fresh beating on Wall Street as its share price
dropped 10 percent amid renewed concerns over profit margins at the
computer services provider. On the New York Stock Exchange, shares of
the Plano, Texas-based company fell $4.375 to close at $38.625 in
trading of 5.8 million shares, almost five times the daily average.
The sharp decline came as a string of brokerage firms cut their
earnings estimates and ratings for the company on the heels of EDS'
first-quarter results, which were released after the U.S. financial
markets closed on Thursday. While operating earnings came in just
below market expectations, analysts saw cause for concern over
declining profit margins, especially in the company's business with
its former parent company, General Motors Corp. (GM - news).
Goldman Sachs lowered its rating on EDS to market perform from market
outperform, and UBS Securities cut its rating to hold from buy. Lehman
Brothers reduced its 1998 earnings estimate to $1.80 from $2.08 and
the 1999 estimate to $2.00 from $2.35.
Since EDS was spun off from GM in 1996, it has repeatedly disappointed
Wall Street as it has struggled to win new contracts and keep profit
margins healthy.
Its share price rose to above $60 in October 1996 but then slumped. IT
has failed to recover even as the broader market has surged.
The latest problems are concentrated in the company's business with
GM, which is still its largest client. But the No. 1 U.S. automaker is
putting more contracts up for open bid, while margins have eroded on
contracts that EDS has retained.
''Heavier cost-cutting at GM appears to be putting more pressure on
EDS' earnings outlook compared to management's earlier expectations,''
said Goldman Sachs analyst Gregory Gould, who cut his 1998 earnings
estimate to $2.10 from $2.15.
EDS reported first-quarter net income of $184.2 million, or 37 cents
per share, down from $194.1 million, or 39 cents, in the same quarter
last year. Operating net income, excluding charges, was $211.3
million, or 43 cents, a penny shy of Wall Street expectations.
Total revenues grew almost 10 percent to $3.94 billion in the quarter,
and EDS signed new contracts worth a healthy $2.4 billion.
Even so, margins were sharply lower. Gross margins came in at 18.1
percent, down from 19.4 percent in the same period last year, and
operating margins fell to 7.7 percent from 9.1 percent.
Moshe Katri, an analyst with UBS Securities, said he thought EDS'
management was ''caught off guard'' by the drop in margins on its GM
business.
''It just seems that the company does not have a very good grasp on
where its numbers are going to be, and that is pretty worrying,'' he
said.
To be sure, analysts said EDS was posting strong revenues and was
successful in winning business from companies other than GM.
''This eventually can be a good story but not in the near-term because
you have too much of the revenues coming from GM and those are going
down,'' said Gary Helmig, an analyst with SoundView Financial. ''This
is a longer-term recovery story than just a couple of quarters.''
The latest disappointment was all the more frustrating because EDS'
share price had begun to rise in recent months, and analysts said they
thought the company was finally turning the corner.
''We kind of thought they had got their act together earlier this
year, then all of a sudden things are coming back again,'' Katri said.
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