Shares of Unisys ( UIS) rebounded Tuesday after two analysts raised their ratings on the stock, arguing that investors overreacted a day earlier to a federal audit of a $1 billion contract. Unisys shares recently climbed 55 cents, or 12.2%, to $5.05. That didn't fully make up for the 19% fall in the stock a day earlier in response to media reports of Unisys substantially
overbilling on a $1 billion contract with the Transportation Security Administration. Following the big selloff, Morgan Stanley raised its rating on Unisys to overweight from equal-weight while Moors & Cabot raised its rating to hold from sell. Analysts from both firms pointed out that the overbilling amount is not substantial -- less than $15 million -- relative to the size of the $1 billion contract. Both analysts also appeared to give Unisys the benefit of the doubt, noting that procurement problems have become more common, particularly in post-9/11 contracts, and that the transportation agency appears to be negotiating with Unisys to extend the contract despite the billing troubles. Morgan Stanley analyst Julie Santoriello noted that Unisys stock now looks cheap relative to other troubled or restructuring IT services and hardware companies. Before the rebound Tuesday, shares were trading around 13 times 2006 earnings, compared with 20 times for Electronic Data Systems ( EDS), 14 times for Computer Sciences ( CSC), 17 times for BearingPoint ( BE) and 16 times for Hewlett-Packard ( HPQ), according to Santoriello. Morgan Stanley has done investment banking with Unisys. The inexpensive valuation, coupled with a restructuring, could pique interest from private investors interested in the outsourcing sector, as evidenced by a recent report about takeover talks for rival Computer Sciences, Santoriello wrote. Still, Santoriello added a couple of caveats. "While we highly doubt the company is guilty of fraud, proof of such charges could be disastrous -- TSA is Unisys' marquee contract," she wrote.
"Finally, this is not a call on fundamentals," she added. "It is too soon to tell if Unisys' planned restructuring will be sufficient and/or successful." Last week, Unisys announced a
restructuring, including slashing 10% of its workforce, when its third quarter swung to a loss on a 4% drop in sales from a year earlier. Moors & Cabot analyst Cindy Shaw estimated that the potential overbilling could reach $12 million, which could result in a one-time hit to earnings of 2.4 cents a share. The larger concern, she said, is the potential impact on the company's federal business, which she estimates accounts for the mid- to high-teen percentages of total revenue. Shaw said she doesn't expect the stock to fully recover for some time, but called the selling "overdone." "In our experience these sort of issues occur regularly and are usually resolved quietly," Shaw wrote. "Furthermore, we think the rush nature of the TSA contract was a set-up for billing issues." Shaw added, noting that it was a post-9/11 contract with priority on improving airport screening as soon as possible and details left to be figured out later. Shaw's firm hasn't done any banking with Unisys.