Affiliated Computer Upgraded; Shares Rise

Resolving its stock options probe helps the cause.
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Investors jumped back into

Affiliated Computer Services

(ACS)

shares on Wednesday, a day after the company edged Wall Street's earnings estimates and resolved its stock options investigation.

ACS shares picked up 6.1%, adding $3.09, to $53.56 in recent trading.

A number of Wall Street analysts were cautiously optimistic. Credit Suisse research analyst Eric Sledgister upgraded the IT services firm to hold from sell, noting that ACS is now current with its

Securities and Exchange Commission

filings after the options debacle, allowing management to focus on running the business again, which should yield improved financial results.

ACS has a new executive team piloting the company. CEO Lynn Blodgett and CFO John Rexford took over for former CEO Mark King and CFO Warren Edwards in November after the two were pegged for

backdating stock options for financial gain.

In addition, the stock is trading at a reasonable valuation, Sledgister noted: "ACS trades at 6 times and 15 times our calendar year 2007 EBITDA and EPS estimates, vs. a normalized historical forward multiple of 16 to 19 times."

Credit Suisse has a banking relationship with ACS.

For the

second quarter, the Dallas-based IT services firm posted a net income of $72.1 million, or 72 cents a share, falling from $102.4 million, or 81 cents a share, in the same three-month period last year.

Without 9 cents a share in legal and other costs related to its stock options probe and a 2-cents-a-share gain on hedging instruments, the company earned 79 cents a share for the quarter, beating the 78 cents a share Wall Street expected.

Sales for the quarter were $1.43 billion, rising from $1.35 billion in the same timeframe a year ago and just under the $1.44 billion forecast by analysts.

ACS said its pipeline for new deals is $1.4 billion. ACS also reported that it nabbed 158 of the 169 deals it sought to renew.

"Pipeline strength appeared broad-based, with commercial and government transactional BPO (business process outsourcing), health care and transportation opportunities heading the charge," Prudential Equity Group's Bryan Keane wrote in a note following Tuesday's results. "Additionally, first half of 2007 renewal rates of approximately 95% speak favorably to customer satisfaction.

"With new management at the helm, we look for ACS' recovery to gain further traction," Keane wrote.

He has a hold rating on ACS and his firm does not have a banking relationship with the company.

But other observers still need to see more.

"There are certainly signs that things are turning around, but I still think risks remain," Standard & Poors equity analyst Dylan Cathers says. One concern is the lingering shareholder lawsuits that are yet to be resolved, even if the company's own options probe has wrapped up, he says.

Cathers was pleased with the company's strong sales results in its government sector, which grew 4% internally, a decent improvement from previous quarters. But the commercial sector --which makes up 60% of the company's revenue -- lagged, with sales below expectations.

"In the last six quarters, they've had a number of one-time charges, acquisitions, a divestiture. A period of relative calm would be nice to see," Cathers says. "That way, we could get a better picture of what exactly is happening in the two major segments."

He recommends staying on the sidelines, with a hold rating on shares. He does not own shares and his firm doesn't do banking.