Value and technology aren't often used in the same sentence, but a group of money managers at the
Goldman Sachs Technology Investment Symposium
have found at least one tech stock that still looks attractive on a valuation basis.
Electronic Data Systems
, a leader along with
in outsourcing, has caught the attention of momentum investors and value hounds alike, say three money managers at the conference. They point to its hefty backlog and a CEO who's intent on cutting costs, as well as the heat being generated in the market by outsourcing-related business.
The business services, consulting and outsourcing outfit, which was founded by Ross Perot in 1962, may actually be one of the slower-growing tech companies at Goldman, but it's a turnaround story -- and money managers love a good turnaround story. "We're sensing EDS' turn is for real," says Kimberly Scott, an analyst at
Waddell & Reed
, which owns EDS. Waddell doesn't rate stocks.
A year ago, EDS was in disarray when CEO Dick Brown took the reins. And through nine months of 1999, EDS was still in bad shape: Net income fell 37% from a year earlier to $378 million. But for EDS' fourth quarter, Brown did as he promised and put up a big number. Fourth-quarter net income jumped 15% to $295 million, or 61 cents a share, 2 cents above expectations.
EDS has seen its stock rise 50% since early November in anticipation of just such a turnaround. Now that Brown appears to be on the right path, the money managers are excited. "Brown is using the 'no sacred cow' theory, much like what Gerstner did with IBM," explains Scott, referring to the executive's directive to cut costs by slashing operational centers to four from 49.
Turning It Around
Brown has also redirected resources to outsourcing, a hot area as evidenced by the rise in the stocks of application service providers such as
That change in business focus has these managers excited. Scott points to such new contracts as a deal with
, in which EDS promises to save its clients 5% in business efficiencies and then takes 1% of the contract in compensation.
EDS also said it has seen a fourfold increase in customer contracts, edging ahead of rival IBM for the first time in years. As of the end of 1999, EDS' backlog was just over $60 billion, roughly the same size as IBM's.
"I am really warming up to EDS because they are starting to put up big backlog numbers -- that's what first got investors interested in IBM," says one money manager at the conference who requested anonymity. The manager's firm recently became an EDS shareholder.
For investors who may feel EDS is a bit too expensive, there may be a chance to re-enter the stock at a lower price, surmises Andy Graves, a manager with
, which doesn't own EDS stock. This week, he explains,
announced that it plans to sell 20 million EDS shares to better diversify its pension plan. GM spun out EDS in 1996 and EDS still garners 25% of its revenue from the automaker.
While this increase in the float could initially push EDS' stock down "5 or 10 points" at the time, says Graves, it would also "allow us to buy EDS at a cheaper price." After a brief bottom, EDS should be able to hit a new high. "It could then go as high as 90," says Graves.
At 73, EDS now trades at 32 times this year's earnings, but the company's new contracts and backlog should help EDS beat its target of 12% earnings growth over the next three years, the managers say.
EDS' Brown seemed to leave a pretty good impression on Goldman clients and buy-siders. After his presentation, he received a much longer round of applause than normal. "We usually do our homework and buy before we even get here," says the manager who recently got his firm into EDS. "Brown just confirmed that we had made the right bet."