Is Unisys Hiding Weakness?

Unisys (NYSE: UIS  ) carries $323.6 million of goodwill and other intangibles on its balance sheet. Sometimes goodwill, especially when it's excessive, can foreshadow problems down the road. Could this be the case with Unisys?

Before we answer that, let's look at what could go wrong.

AOL blows up
In early 2002, AOL Time Warner was trading for $66.27 per share.

It had $209 billion of assets on its balance sheet, and $128 billion of that was in the form of goodwill and other intangible assets. Goodwill is simply the difference between the price paid for a company during an acquisition and the net assets of the acquired company. The $128 billion of goodwill in this case was created when AOL and Time Warner merged in 2000.

The problem with inflating your net assets with goodwill is that it can -- being intangible after all -- go away if the acquisition or merger doesn't create the amount of value that was expected. That's what happened in AOL Time Warner's case. It had to write off most of the goodwill over the next few months, and one year later that line item had shrunk to $37 billion. Investors punished the stock along the way, sending it down to $27.04 -- or nearly a 60% loss.

In his fine book It's Earnings That Count, Hewitt Heiserman explains the AOL situation and how two simple metrics can help minimize your risk of owning a company that may blow up like this. Let's see how Unisys holds up using his two metrics.

Intangible assets ratio
This ratio shows us the percentage of total assets made up by goodwill and other intangibles. Heiserman says he views anything over 20% as worrisome, "because management might be overpaying for the acquisition or acquisitions that gave rise to the goodwill."

Unisys has an intangible assets ratio of 13%.

This is below Heiserman's threshold, and a sign that any growth you see with the company is probably organic. But we're not through; let's also take a look at tangible book value.

Tangible book value
Tangible book value is simply what remains after subtracting goodwill and other intangibles from shareholders' equity (also known as book value). If this is not a positive value, Heiserman advises you to avoid the company because it may "lack the balance sheet muscle to protect [itself] in a recession or from better-financed competitors."

Unisys' tangible book value is -$1.2 billion, which obviously raises a yellow flag.

Foolish bottom line
To recap, here are Unisys' numbers, as well as a bonus look at a few other companies in its industry:

Company

Intangible Assets Ratio

Tangible Book Value (millions)

Unisys 13% ($1,179)
Accenture (NYSE: ACN  ) 7% $2,747
Hewlett-Packard (NYSE: HPQ  ) 43% ($16,824)
International Business Machines (NYSE: IBM  ) 25% ($5,655)

Source: S&P Capital IQ.

If you own Unisys, or any other company that fails one of these checks, make sure you understand the business model and management's objectives. You can never base an entire investment thesis on one or two metrics, but there is a yellow flag here. I'll help you keep a close eye on these ratios over the next few quarters by updating them soon after each earnings report.

Fool analyst Rex Moore owns no companies mentioned in this article.

The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services have recommended buying shares of Accenture. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 15, 2011, at 11:44 AM, moremoney4u wrote:

    I don't get it.

    The article says "Heiserman says he views anything over 20% as worrisome". Then the author says "Unisys has an intangible assets ratio of 13%." Ok, so Unisys is under 20% which is good.

    Why isn't this article titled "Is IBM or HP Hiding Weakness?"

    HP at 43% and IBM at 25% are actually over 20%.

    So I guess the answer to the question "Is Unisys Hiding Weakness?", well, is NO!

  • Report this Comment On December 20, 2011, at 11:53 AM, sundo7t2 wrote:

    And, the second worrying factor would be the tangible book value for both IBM and HP. They are worse than Unisys. So, we may have another issue as well. Why wouldn't the title say instead 'Is Accenture the best bet for you in today's market?' since it seems to be doing well in both the sectors?

    ACN is not a company that is in the hardware business but the other 3 are. So, is there an issue there as well?

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