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Morgan Stanley Cuts EDS to 'Neutral'

Morgan Stanley downgraded Electronic Data (EDS) to neutral from outperform.

Analyst David Togut says earnings quality continues to deteriorate as free cash flow declines, despite strong growth in earnings. He notes such trends historically signal potential problems for computer services stocks. He says the outlook for General Motors revenue has softened suddenly, and he believes it will likely fall 8%-10% in the second half as General Motors cuts back on discretionary IT spending.

Togut says the stock has reached its $64 discounted cash flow value, and is trading at the top of its four-year price-to-earnings range relative to the S&P Industrials. He sees $2.64 2001 EPS, and $2.95 EPS for 2002.

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