Unisys Walloped on Slow Sales Richard McCaffery (TMF Gibson)
October 14, 1999
Shares of systems integration and hardware company Unisys (NYSE: UIS) got clobbered in trading -- falling around 35% -- as Q3 revenue growth came in unexpectedly slow.
Sales at the Blue Bell, Pennsylvania integrator increased just 4% to $1.87 billion from $1.79 billion a year ago. Company officials attributed poor top line growth to currency issues as well as weakness in its network services and NT services lines, in part because technology spending is tight during the Y2K transition. Some analysts expected top line growth twice as high, so, look out below.
A PaineWebber analyst cut his rating on the stock from 'attractive' to 'neutral.'
Before today's blood bath, Unisys traded at a 1999 price-to-earnings ratio of 27, so it's not surprising to see it plunge on the surprise. After all, heavyweight rivals like Computer Sciences (NYSE: CSC) and IBM (NYSE: IBM) were trading at multiples of 23.7 and 26.7, respectively, this morning.
A little bit of perspective, though. While that kind of sales growth is lousy news, year 2000 concerns have made IT spending wacky all year. This means it's probably too soon to call the recent quarter a trend. Instead, take the long view and look for growth to return to previous levels as Y2K shakes out. Revenue last year for the same quarter grew 10%.
So how will the Blue Bell, Pennsylvania put a torch to growth? E-business. Unisys is realigning its approach to pursue opportunities in outsourcing, network services, and enterprise NT. Unisys is strong in these areas, so the new approach makes sense.
This is not a first step into e-business applications for Unisys. The company's Cool ICE software product links e-commerce systems with legacy systems, a process used to Web enable existing businesses. Unisys estimates that 70% of stored data sits on legacy systems, and businesses need products like Cool ICE to get at it. There should be lots of room for growth there.
On the bright side, Unisys reported third quarter income (excluding one-time items) of $0.40 per share, up 60% from last year on higher-than-expected product sales and continued margin improvement.
The company continued to improve its balance sheet by redeeming the last of its preferred stock -- a move that eliminates payment of $106 million in annual dividends -- and repurchasing $141 of high yield bonds.
Chief Executive Lawrence Weinbach has made debt-slashing a priority during his tenure, a campaign that's helped dig Unisys out from life in the Wall Street bunkers. Weinbach has cut $1.3 billion in debt from the balance sheet, leaving total long-term debt of $951 million. The company is committed to cleaning up its balance sheet.
After today's mugging, Unisys trades at a P/E around 18.4. Might be worth a look.