What happened
Shares of DXC Technology (DXC 3.29%) rose 34.9% in November 2019, according to data from S&P Global Market Intelligence. The provider of enterprise-class IT services entered the month at a negative return of 48% year to date, due to disappointing financial forecasts and a sudden change of leadership. The company finally caught a break in mid-November, when share prices surged as much as 20% in a single day on the heels of a disappointing earnings report paired with cuts to DXC's full-year guidance. Management also announced a wide-ranging reorganization of the entire company, including plans to sell off businesses that are no longer part of DXC's core operations.
So what
Yes, DXC really surged on the back of a terrible earnings report. Analysts had been looking for second-quarter earnings near $1.42 per share on sales in the neighborhood of $4.92 billion. The company produced adjusted earnings of $1.38 per share on revenues of $4.85 billion. Looking ahead, management slashed its full-year earnings target from roughly $7.38 per share to $5.50 per share alongside a 4% cut to the annual revenue target.
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Now what
DXC's investors largely shrugged off the weak results and guidance to focus on the promise of a leaner, meaner business model.
Hoping to find buyers for three of its five reportable business units, DXC will focus on what CEO Mike Salvino calls "the enterprise technology stack." That starts with infrastructure technology (ITO) and cloud services, ending in data analytics and actionable advisory services.
These products and services currently account for roughly 75% of DXC's total revenues, so the company is selling off a large number of smaller operations here. The refocused business model is expected to make up for those lost revenues with faster growth and wider profit margins in the remaining operations.
In light of the restructuring news, some analysts saw the guidance cuts as a "reset" of near-term expectations that could give DXC more freedom to execute the strategy shift.
The stock is still trading 42% lower in 2019, but the November surge could be the start of a turnaround story. However, I'm not itching to bet on that idea until Salvino finds a buyer for his less-favored business operations.
