(Editor's note: This article has been corrected to reflect that it was only Fitch Ratings that lowered EDS's credit rating, and that the rating was lowered to one grade above junk status.)
CNN Moneyline anchor Lou Dobbs rails against Electronic Data Systems
Shares have slid as credit rating agency Fitch Ratings lowered the company to one grade above junk status at "BBB-minus," raising borrowing costs and worrying potential customers. The sell-off last week of its design-software subsidiary, PLM, for $2.05 billion aims to build up cash to offset debt.
Sure, the sale improves liquidity, but it also removes a valuable business. In 2003, the PML business produced nearly $900 million in revenue and $110 million in profits for Electronic Data Systems. In other words, 20% of EDS's total operating earnings and 35% of its free cash flow vanish as a result of the sale.
Electronic Data Systems has boasted that it could offer whatever technology its clients asked for. But the high cost of supporting numerous software and hardware combinations has made competing with IBM
Competition in the IT outsourcing market is getting more intense. Besides IBM, there are plenty of other contenders: Accenture
New bookings are sluggish, and several existing contracts -- to the tune of $2.5 billion -- are at risk. Electronic Data Systems' biggest contract, with General Motors
The stock has dropped in the last 12 months, but it hasn't hit bottom. Assuming Electronic Data Systems manages to hold on to the General Motors and Navy contracts, the stock trades at a 36 times 2004 earnings and 21 times 2005 earnings. By comparison, EDS peers Accenture, Computer Sciences, Unisys, and BearingPoint trade at an average17 times 2005 earnings. Electronic Data Systems' big premium will be hard to support for long -- even if more work is sent to India.
Fool contributor Ben McClure hails from the Great White North. He doesn't own any shares of companies mentioned here.
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