EDS in the Slow Lane

When information technology (IT) services company EDS (NYSE: EDS  ) reported its Q1 earnings in early May, the company indicated that it suffered from weakness in North America. As a result, the stock slid 6% to $27.49. Unfortunately, things haven't improved much and on last week's Q2 report, the stock dropped yet again and now trades at $23.40.

Revenues came in at $5.45 billion, which was a 5% increase over the past year. It was a lackluster performance when compared to the much stronger top-line growth rates of rivals like Accenture (NYSE: ACN  ) and IBM (NYSE: IBM  ) .

EDS signed $4.3 billion in new contracts, which fell short of $5.4 billion in the same period a year ago. Keep in mind that three major contracts slipped at the end of Q2.

Net income was $138 million, or $0.26 per share, which compares to $104 million or $0.20 per share in the same period a year ago. EDS continues to gain cost savings from automation tools and offshoring.

However, Indian IT operators like Wipro (NYSE: WIT  ) and Infosys Technologies (Nasdaq: INFY  ) are moving aggressively into some of EDS' core areas such as infrastructure outsourcing. Might this be a reason for the weakness in EDS? It's hard to tell and the company has been quiet on the matter.

Yet it looks like we'll hear about some M&A deals from EDS. On the conference call, management said that there are seven to eight deals in negotiation. With the meltdown in the credit markets and private equity space, EDS is finding it easier to getter better valuations.

But the fact remains that contract signings are slowing down and this could be a drag on growth in 2008. Instead of expecting more than $23 billion in signings, EDS has tempered expectations and thinks the figure will be about $23 billion. The company also reduced its full-year cash flow guidance from $1 billion-$1.1 billion to $900 million. And if it is true that Indian rivals are making headway -- which seems reasonable -- then the slowness may continue for some time.

Further informative Foolishness:

Accenture is a Motley Fool Inside Value recommendation and is up 79% since it was recommended in July 2005. Take a free 30-day trial and see what other recommendations are beating the market.

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 4,156 out of more than 60,000 in Motley Fool CAPS. The Fool has a disclosure policy.


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