RealMoney Silver - Insider Purchases & Buybacks: EDS' Error

Insider Purchases & Buybacks: EDS' Error
By Jason Raznick
RealMoney.com Contributor
12/6/2007 11:59 AM EST

Electronic Data Systems (EDS) has just announced a buyback program, but I expect the stock to feel the pressure of lower spending on consulting services due to a general economic slowdown. (Check out the rest of the insider trades and buybacks on Stockpickr.)

Plano, Texas-based EDS' board has approved a repurchase program authorizing the company to buy back up to $1 billion worth of common stock over the next 18 months. EDS also announced that on Dec. 31, CEO Ron Rittenmeyer would replace Mike Jordan as chairman. Rittenmeyer will retain his titles of president and CEO.

Early last month, the leading technology services company issued a bullish earnings report for the third quarter, beating Wall Street expectations. Earnings surged 80% to $225 million, or 42 cents a share, in the quarter ended Sept. 30.

That said, I must add that I am a little wary of going bullish on EDS' stock. Of course, the company can boast of having signed contracts worth $5.7 billion in the latest quarter. But the underlying business is still an area of concern.

The current macroeconomic environment isn't helping. Enterprise technology spending could be soft next year. Verizon (VZ) has just terminated its multi-billion-dollar deal with EDS. EDS will have to forgo between $225 million and $295 million worth of Verizon work. This does not bode well for the company's 2008 prospects, especially because most of the spending by CIOs is likely to be back-end-loaded. Credit Suisse, which has an underperform rating on EDS, said that the company "will face a tough challenge filling in the lost business in FY08, but sees a recovery in FY09."

Lest you think I'm being overly cautious, let's look at what the company is saying. EDS has guided to a decline in its earnings per share from an estimated $1.55-$1.60 this year to $1.35 in 2008. So even the shares trading close to their 52-week lows can't excite me enough to load up on EDS.

Worse, two investment funds have reduced their stakes in EDS:

Schwab Technology fund is managed by Larry Mano and has a Morningstar rating of 4 stars. The fund's objective is long-term capital growth. It has one-year returns of 11.35%. The fund also owns IBM (IBM) , Hewlett-Packard (HPQ) and Cisco (CSCO) .

Wells Fargo Advantage Mid Cap, run by Robert Costomiris, has a Morningstar rating of 4 stars. The fund's objective is capital appreciation, and it has generated one-year returns of 13.52%. The fund's other holdings include Coca-Cola Enterprises (CCE) , Applied Materials (AMAT) and Waste Management (WMI) .

The company's reliance on U.S. customers is high and the market is tough, with stiff competition from other big, quality players. In this scenario, margins are under pressure and the company has a lot of dependence on traditional IT outsourcing. Goldman Sachs analysts have cut their target price on EDS from $26 to $22, while Standard & Poor's has a 2-star (sell) rating on the company.

EDS' buyback doesn't seem like a sound decision at this time. But with the shares falling, EDS may have felt inclined to keep shareholders happy. With the loss of the Verizon account and the concerns over slowing capital spending by businesses, I expect the stock to remain in the low $20s in the near term.