EDS Puts Its House in Order

The tech contractor nearly doubles its profit and sees an even brighter 2007, sending its shares higher

Electronic Data Systems (EDS) took another step in its multi-year turnaround effort by posting a sharp jump in fourth-quarter profit. The Plano (Tex.)-based provider of IT outsourcing services on Feb. 7 reported adjusted earnings per share for the period of 47 cents, vs. 21 cents. Revenue rose 11% to $5.7 billion.

"On balance, this was the strongest quarter EDS has had since I joined the company in 2003," said EDS CEO Mike Jordan in a press release.

EDS struggled in recent years as it lost clients to lower-cost rivals in part because it was slow to establish low-cost offshore capabilities in places like India. The misery included a $1.7 billion loss in 2003, which was caused primarily by a costly, multibillion contract it signed with the U.S. Navy to establish an Intranet. Jordan took the reins that year after a stint as CEO of Westinghouse and launched a revival plan to sell off non-core assets and boost the company's business in fast growing areas such as India and China (see BusinessWeek.com, 6/26/06, "EDS: Getting Out Front in Outsourcing").

The company has continued its heavy investment in overseas expansion. Indeed, the fastest revenue growth in the quarter came from the Asia-Pacific region, which logged a 19% revenue gain. Good growth was also seen in the company's government segment, which rose 10%.

"This quarter’s strong performance was driven by contract execution, relentless focus on productivity and revenue growth," said Ron Rittenmeyer, EDS president and chief operating officer. The company's efforts have paid off, as fourth-quarter operating margin grew to 6.8% on an adjusted basis, vs. 4.4% a year earlier.

The company appears to have momentum on its side. EDS signed $7.6 billion in contracts in the fourth quarter of 2006 versus $5.3 billion in the year-ago quarter.

EDS sees revenue of $22 to $22.5 billion in 2007 compared to the $21.3 billion it posted in 2006. It expects adjusted EPS of $1.60 this year, vs. 99 cents for 2006. The current-year figure excludes the impact of reversals of previously recognized restructuring expenses, discontinued operations, and gains and losses on divestitures.

Investors bid the shares 2.3% higher to $27.69 in midday trading Feb. 8 on the New York Stock Exchange.

Standard & Poor's equity analyst Dylan Cathers echoed the market's bullish stance in a Feb. 8 research note, reiterating his buy rating on the shares. Cathers said fourth quarter EPS was 13 cents ahead of his estimate. The analyst sees revenues growing 5% in 2007 from “the ramp-up of contracts signed in 2006, ongoing contract wins, and strong gains in the Asia-Pacific region.” He raised his target price on the stock by $2 to $32. (S&P, like BusinessWeek.com, is a unit of The McGraw-Hill Cos.)