Perot Systems Prepares for 2007

For shareholders of information technology consulting firm Perot Systems (NYSE: PER  ) , it's been an uneventful year. The stock has remained stubbornly mired between $13 and $15. But as shares stagnate, the company has been racking up lots of business -- and fixing problems with some of its contracts.

In its third-quarter earnings report, Perot reported that revenues increased 14% to $582.9 million. Only 2% of that growth came from its acquisition of eServ.

However, net income was weak, generating only $300,000 for the quarter for breakeven results on an earnings-per-share basis. In the year-ago quarter, the company posted net income of $25.4 million, or $0.21 per share.

Founded in 1988, Perot Systems is now a global provider of high-end IT services, implementing major tech systems, handling back-office needs and developing business applications.

But as it's seen this year, the business can be tough. Major IT projects result from intense competition -- involving biggies like IBM (NYSE: IBM  ) , Accenture (NYSE: ACN  ) , and EDS (NYSE: EDS  ) -- and have stringent requirements. If things go wrong, the penalties can be severe.

Perot Systems learned this the hard way, taking a $49.5 million expense in the third quarter for "contract modification" issues. This mostly involved reworking a deal with Blue Cross & Blue Shield of Rhode Island.

Fortunately, Perot Systems has been able to snag several major contracts, especially in the health-care sector. In the third quarter, the company added about $676.5 million in new business; in the past 12 months, it has generated $2.3 billion in new contracts.

Perot Systems is also strong in extending existing contracts. In the past quarter, it added about $386 million in additional business from current customers.

For the fourth quarter, management expects revenues of $590 million to $605 million, with earnings per share of $0.22 to $0.24. It also provided earnings guidance for the first quarter of 2006 of $0.18 to $0.20 per share.

With its pipeline of contracts, and its considerable momentum, Perot should continue its growth into 2007. The shares are reasonably valued at present, at 0.73 times revenues. Keep in mind that Cap Gemini recently purchased Kanbay (Nasdaq: KBAY  ) , a similar IT consulting firm, for four times trailing revenues.

It's best to avoid buying a stock on buyout speculation alone. But there's an ongoing uptick in consolidation in the IT space, as big companies try to grab market share and talent. Perot has both of these qualities -- and more importantly, it's got a growing base of revenues that should continue throughout 2007.

Consult with further Foolishness:

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Fool contributor Tom Taulli does not own shares mentioned in this article.He is currently ranked 11th out of 11,654 players in Motley Fool CAPS.


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