Electronic Data Systems ( EDS) could use a little of what it sells. The computer services giant, which promises "business solutions" to everyone from the U.S. government on down, desperately needs a way out of a slowly closing trap. In a nutshell, the company's earnings are sagging. Its expenses are soaring. Its debt load is climbing. And its credit is racing toward junk. Indeed, UBS analyst Adam Frisch -- well-known for his early warnings on the company -- could manage only the slightest reassurance in a dark report issued Wednesday. "We do not see a near-term bankruptcy crisis looming," Frisch offered, forecasting less dreadful possibilities instead. Specifically, Frisch predicted that EDS actually could deplete its cash pile -- and turn to peddling assets and borrowing more -- on its risky turnaround journey. In the meantime, he warned that Tuesday's downgrade by Moody's may not be the last. Moody's lowered EDS' credit to its lowest investment-grade level -- and left the door open for a possible cut to junk -- over concerns about the company's weak cash flow, high severance expenses and future turnaround risks. The downgrade, issued after the market closed Tuesday, took a toll on the company's shares. The stock, which had rallied 50% in recent months, tumbled 4.5% to $21.59 in late afternoon trading.
Frisch, for one, was a bit taken aback. "The offering amounts are higher than we anticipated, possibly indicating greater cash needs than management suggested," wrote Frisch, who has a neutral rating on the stock. "We are concerned that EDS' financial position in the near term is not nearly as good as we thought a few weeks ago." And Frisch hasn't been terribly optimistic in a while. In comparison, Prudential analyst Bryan Keane was almost jolly after last week's meeting. He proclaimed then that the "positives
were slowly starting to outweigh the negatives" at struggling EDS. "We believe ... liquidity appears to be under control," wrote Keane, who also rates the stock a hold. "And we were encouraged by the new management team's vigor to turn the business around." But even Keane conceded that serious challenges remain. And Moody's helped drive that message home with its latest action. Navy personnel and contractors ... we continue to believe that the cash flow stability from the ... contract my not be achievable any time soon, given that major milestones have not yet been achieved and the planned seat rollout appears too aggressive," Frisch said.
Meanwhile, Keane acknowledged that big contracts have cost EDS plenty already. And he cautioned that new setbacks would continue to hit the company's earnings and its credibility going forward. Frisch said the stock is already overvalued. He mentioned the usual lack of earnings visibility. But he also stressed that EDS faces "significant operational and financial issues."
"We believe sustainable strength will not be possible until these issues subside," he said. "And we expect shares to be weaker on recent news." Even after Wednesday's dip, EDS continues to trade above Frisch's current 12-month price target of $21 a share.