Unisys (UIS) - Get Report has got to be one of the most pitiful large companies in U.S. business history. The product of the disastrous merger of the pioneering developers of mainframe computing, Sperry and Burroughs, it has a distinguished record of failing for more than 25 years.
Financial media archives are littered with articles that proclaimed Unisys to be on the comeback trail, but these prognostications were proven wrong again and again as inept managers pursued ill-conceived strategies. Yet today I would like to join that grand tradition and declare that Unisys might actually get off the ropes this time.
To put its laggardly track record in perspective, consider that shares bought in 1979 for a split-adjusted $24 are now worth a grand total of 10 bucks. Over the same span, rival computing giants
, which have had their own problems over the years, have generated returns of 800% and 2,000%, respectively.
In this era of overpriced stocks, this stock is certainly cheap enough at Tuesday's close of $10.68 to find a home in the portfolios of patient value investors.
Unisys has earned $185 million over the past 12 months on $5.9 billion in revenue. The company is expected to earn 55 cents by the end of fiscal 2004 and 65 cents in 2005, but because the analysts are not exactly aglow about the company's prospects, there is not a lot of hype in those numbers. So at a market capitalization of just $3.6 billion today, its current valuation on both a sales and an earnings basis is well below less-motivated rivals. And at 12.0 and 7.6, respectively, Unisys' return on equity and return on capital both surprisingly exceed its rivals.
From a technical perspective, Unisys price action in recent months is encouraging. Shares haven't gone up since the summer, even as most other stocks have appreciated, but they haven't gone down either. That is a small favor, but one that long-time Unisys shareholders can appreciate. The stock is actually tracing out what might be a nice, flat "accumulation" pattern, which is a stage in the cycle of a value stock, as I described in
on Tuesday. This is basically a period in which a beaten-up stock leaves the consciousness of optimistic, impatient growth investors and enters the realm of steadfast but dull buying by sober, patient value investors.
So how will Unisys battle back to around $13 over the next 12 months, which would represent a respectable 22% gain?
First, it should be noted that this
company boasts 35,000-plus employees in 100 countries. It has turned away in recent years from building and installing computer systems toward the delivery of information-technology services and, that big buzz word, "solutions." Basically, the company now wishes to provide consulting, systems integration and the like to governments, financial institutions and other big organizations.
Next, while the company lowered earnings guidance in July when some contracts were unexpectedly deferred until later in the year (leading to the stock dropping 15%), the company reaffirmed guidance a month ago and eased investor worries of further cuts in expectations.
Then, on Oct. 22, Unisys tapped Joe McGrath as its new chief executive, and he promised to focus on turning the company into a lean, mean services machine that delivers reliable cash flows. Replacing veteran CEO Lawrence A. Weinbach, who moves upstairs to chairman, McGrath has vowed to cut headcount to save as much as $70 million a year, invest in Asia and enhance the company's lackluster sales and marketing efforts.
Finally, the company's recent list of press releases and appearances in news stories make it apparent that Unisys is at least fighting a nice PR war now, pushing its rather compelling story line out to the media and potential clients by touting its capability to help battle check fraud, speed drug applications at the FDA, fight identity theft and support supercomputer research.
It will take more than passion to turn this creaking battleship around, but there is definitely potential to win back some of the business it has lost over the years and beat weak year-over-year comparisons in 2005. With pessimism over its prospects so profound, it won't take much to impress people. And if it fails, I promise to wait several years before I write about Unisys' capacity to rebound from the $5 level.
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Jon D. Markman is publisher of
StockTactics Advisor, an independent weekly investment research service, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. He also writes a weekly column for
CNBC on MSN Money. While Markman cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
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