When Affiliated Computer Services (ACS) announced plans to repurchase up to $1 billion of its stock last week, investors might have had a Yogi Berra moment -- deja vu all over again.
Throughout the first half of this year, ACS has tried several different tactics to boost shareholder value. Though each avenue has failed to gain favor with the market, some analysts say the latest share-repurchase plan will finally help the company break out of its slump.
At the beginning of the year, ACS was reportedly on a the verge of being sold, but talks fell apart. Then in March, ACS borrowed a boatload of cash to
purchase up to 55.5 million shares, or 45% of the company, in a Dutch auction tender offer.
But just a fraction of investors decided to participate, representing about 6% of the shares at a price of $63 each, or $465 million in total.
However, the company maintains that its balance sheet is in good shape. In connection with the Dutch auction, the company set up a seven-year credit agreement, totaling $800 million and a second credit facility for a six-year $1 billion loan. The credit agreements also set up an accordion feature worth $3 billion for future borrowings to buy back stock or pay off debt.
The open-ended program announced last week to repurchase Class A common stock represents about 18% of the company's outstanding shares. ACS hasn't given a timetable for when it plans to buy back the shares.
Following the unremarkable response to the Dutch auction this spring, the stock, which had been hanging around in the low $60s, began its descent. The company's stock price also suffered after ACS revealed it was one of the companies under investigation by the
Securities and Exchange Commission
for its stock-options practices and had a
subpar March quarter.
Investors who declined to sell at the time of the auction, which was the vast majority of them, were burned.
"You can certainly see why there's been a selloff," says Dylan Cathers, an equity analyst with Standard & Poor's. "The shareholders must be disappointed."
But for those who did hold on to their shares, Cathers says he doesn't see too much more downside risk, setting aside any future backdating issues, which now include the inevitable shareholder lawsuits. The company has said it will record a
$40 million charge based on an internal review of its stock-options practices.
"It's selling at 15 times earnings," he says. "That's an extremely low number compared to its peers in the sector."
"If the company felt the stock was worth a buy at $63, they must be thrilled to buy the stock at this level," Cathers says. "If they do manage to purchase all those shares, it would be substantially accretive to earnings."
And it's money well spent for the company to repurchase shares rather than reinvest in the company through an acquisition, he said. He has a hold rating on the company.
"The stock is so cheap that it makes a lot of sense for the company to buy it at this price," Cathers says. "In terms of a large acquisition, I think they'd be better served in working on their current internal issues rather than taking on the challenge of making a sizable acquisition."
Another analyst, William Loomis of Stifel Nicolaus, also sees a decent bargain. "Our buy recommendation is predicated on ACS shares' reasonable valuation and what we view as a solid core business with potential margin expansion," he wrote in a recent client note. Loomis doesn't own shares of ACS.
And ACS' stock price since the buyback announcement reflects the positive feelings. Since Monday's buyback announcement, shares have risen over 5% last week to close at $48.90.
"The company has a good recurring cash flow model, such that they can support this level of debt," says John Moore, senior analyst for IT services at Moody's Investors Service. "There are firms that are levered up a lot more."
Still, Moore says that borrowing for share repurchases isn't necessarily a positive credit factor: "We like to see debt reduction and at least a balance with regard to shareholder interests."
Neither Cathers or Moore has any affiliation with ACS, and their firms don't do any banking with the company.