Soundview Downgrades EDS Shares On Restructuring Concerns

The equities research firm says any benefits from the services firm's restructuring are at least a year and a half away.

Paul McDougall, Editor At Large, InformationWeek

June 19, 2003

2 Min Read

Equities research firm Soundview Technologies on Thursday downgraded its rating on EDS, noting that any benefit the IT services firm derives from its restructuring plan is at least 18 months away.

"Management laid out a good plan, but there is a lot of execution risk given the challenges and number of moving parts," Soundview analyst John Jones says.

The downgrade came one day after EDS unveiled a sweeping restructuring plan with an eye toward improving its shaky finances and enhancing service offerings in profitable markets. EDS also said it would fire about 2% of its workforce—about 2,700 staffers—as it consolidates administrative functions.

Despite the moves, Jones believes a number of issues will hamper EDS's ability to grow revenue and profits. For instance, he thinks EDS will break even at best on its largest contract—an $8.8 billion deal extending through 2010 to build an intranet for the U.S. Navy and Marine Corps. On the upside, Soundview researchers say the project will over its lifespan generate $2 billion in free cash flow for EDS.

Jones says stiff competition may thwart EDS's plan to increase revenue by placing more emphasis on hot new services offerings such as business-process outsourcing. He notes that IBM and Accenture have a significant head start in that market. "We believe first-mover advantage is important," he says. Jones also calls EDS's per-share earnings forecast of between $1.33 and $1.45 for calendar year 2003 "about as bad as it gets." Soundview originally predicted that EDS would earn $1.60 per share this year.

EDS was doubtless hoping for more positive reaction to its restructuring plan. The firm hopes to reduce costs and grow revenue by consolidating some operations while increasing investment in growth areas. The plan includes stepping up operations in countries where IT labor is cheaper than prevailing rates in the United States. Canada, Egypt, India, and New Zealand are among the countries where EDS plans to increase service-delivery capabilities. EDS may also exit some markets, indicating in a statement that it's "reviewing noncore, nonstrategic assets" in an effort to raise $250 million in cash this year. The company ended the first quarter with $1.5 billion in cash.

About the Author(s)

Paul McDougall

Editor At Large, InformationWeek

Paul McDougall is a former editor for InformationWeek.

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