Long-Term Outlook Sparks EDS

Updated from 5:05 p.m. EDT

EDS(EDS Quote), which preannounced stronger-than-expected second-quarter results and raised full-year guidance last week, said Wednesday that 2006 earnings would far surpass analyst expectations.

For the first time, the Plano, Texas, IT-outsourcing company gave "directional" 2006 pro forma EPS guidance, pegging the measure at $1 or more. That's far higher than the 66-cents-a-share consensus estimate gathered by Thomson First Call.

The forecast boosted EDS shares nearly 8% in recent after-hours trading to $22.93, after they gained 3.7% to close at $21.29 in regular trading.

In addition to the earnings guidance, EDS said it expects free cash flow of $800 million to $1 billion in 2006, up from $500 million to $700 million in 2005.

The new target for earnings in 2006 represents a near doubling from 2005, when the company projects that pro forma earnings will range between 50 cents and 60 cents a share.

"I'd say we're more confident today than we were six months ago," CFO Bob Swan said in a postclose conference call. "The discretionary projects seem to be on an uptick."

The company decided to give 2006 earnings guidance earlier than usual because analysts were so far off the company's target, executives said.

Still, Jefferies analyst Joe Vafi noted a dollar per share in earnings is still "muted" compared with the company's business a few years ago. (He has an underperform rating on EDS and his firm hasn't done banking with the company.)

Additionally, Vafi said EDS is more a cash-flow story than an earnings story. And EDS is not forecasting that cash flow will double, he noted. The difference in cash flow and EPS trends could be caused by restructuring charges that the company is likely to take as its major customer, General Motors(GM Quote), subjects its work with EDS to competitive bidding next year, Vafi said.