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EDS: Red Flags and Delay of Games


Is this what Ross Perot meant by 'Giant sucking sound'?


As I griped about last night, EDS delayed their earnings report until November 3rd, allowing the company more time to review an impairment charge on their troubled NMCI contract (coincidentally, also allowing the report to fall well under the post-election newsflow radar).

In a darn fine demonstration of positive thinking by the tape, EDS is shaking off the generally negative implications of delaying a report at the last possible minute and is actually trading up about a dime.

While some of the non-reaction is due to the company hitting revenue and EPS guidance, even the shiny-happy focus of EDS' release revealed cause for concern.

Among these concerns:

  • Bookings came in at 3.3B (20- 30% lower than estimates). EDS is (still?) expected to book 17.3B in bookings for the full year.
  • With bookings of 4B in Q's 1 and 2 of this year, and the 3.3 reported last night, that leaves EDS with a 6.1B hurdle for 4th quarter bookings.
  • In addition to bucking the weak and sliding trend in bookings for the current year, booking 6.1B in biz in Q4 would buck declining bookings trend in Q4 for the last 4 years (EDS Q4 bookings: 2000: 15.5B; 2001: 10.1B; 2002: 8.1B; 2003: 4.3)
  • Judging by the reported earnings from other players in the space, EDS is losing share in a weak business. Noteworthy given that EDS is going to have to re-compete for their most lucrative contract, that with GM, in 2006.
  • While there is an element of "Buy the News" being offered in regards to yet another charge on the NMCI contract, that relationship seems to be the never-ending nightmare for EDS. The company has previously taken charges of $334M (1Q03) and $559M (4Q03).
  • The company's debt rating was cut to junk last summer after a 2/3 cut of their dividend. Taking as much as "all" of the stated $700M net asset position remaining in the NMCI contract away would/ will raise their cost of capital considerably (whatever EDS claims their cash flow was in Q3).

This stock is a great example of the difficulties of life on the short side. Despite all the above (and I hardly drained all available bullet point ammo) the 10B mkt cap company trading at 88x current year earning estimates (31x 05 estimates which they won't hit) is still regarded as "cheap" by the Street. Oddly, EDS will almost certainly be viewed the same way in the wake of a likely warning on November 3.

While I see nothing to indicate that the best possible outcome for EDS isn't staggering along until they get swallowed at a level likely much lower than current values it seems to be a short w/out a catalyst, judging by the reaction today. That doesn't make it a long by any means (at least not with my money) it simply suggests that there are better opportunities elsewhere. I don't offer this as advice--we don't do that in Minyanville--I'm simply sharing the process (and frustrations) of real-time trading with hopes that it adds educational value.

position in EDS

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