Upgrade Sparks EDS

Shares of Electronic Data Systems ( EDS) took a little jump Tuesday after an analyst upgraded the stock, citing improving financials and contract discipline.

Shares of EDS recently climbed 81 cents, or 3.5%, to $24.21.

Lehman Brothers analyst Louis R. Miscioscia raised his rating on the IT services firm to overweight from equal weight. His firm hasn't done banking with EDS.

"Our upgrade is based more on a recovery scenario and not on a growth story," Miscioscia wrote Tuesday. He said he believes momentum has turned for EDS, which was bedeviled by several problem contracts a few years ago.

Several of those contracts, including those with the U.S. Navy and Inland Revenue in the U.K, have been either written off or are being turned around, Miscioscia noted. Moreover, the entire company has been centralized and morale has improved since hitting lows in 2002 and 2003, he added.

"Today, any deal which requires $20 million or more in capital is reviewed extensively," Miscioscia wrote. "We have always viewed this area, contract discipline, to be of the utmost importance."

The analyst also believes financials are improving. Bookings are up 20% year over year and should be at least $20 billion in 2006. Miscioscia forecasts earnings in 2005 should be 60 cents a share, hitting the high end of company guidance; 95 cents a share in 2006; and $1.50 a share in 2007, a new target from the analyst.

However, he is modeling no growth in the top line from 2005 to 2006, and then only a modest 2.1% increase in 2007.

In order to meet a 2007 operating margin goal of 8%, EDS will need to move a huge portion of its staff from high-cost locations to offshore sites in Central Europe, India and elsewhere, Miscioscia wrote. The company has stated a goal of expanding its offshore head count from 14,000 today to 28,000 by the end of 2008.

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