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EDS earnings signal recovery

EDS reports positive second-quarter earnings, signaling a quicker road to recovery as the services giant continues to benefit from its restructuring plans.

EDS reported positive second-quarter earnings signaling a quicker road to recovery as the services giant continues to benefit from its restructuring plans.

Analysts agree that EDS is showing signs of recovery and are "impressed" with the early progress its made with its restructuring goals.

In research notes, David Togut, an analyst at Morgan Stanley, said "We believe EDS is on track to achieve its financial goals for this year and next." Togut said that out of all the stocks under the firm's computer and business services coverage, "EDS enjoys the greatest potential for positive change." He rated the company's stock with a "strong buy," and upped his fiscal 1999 earnings per share estimate to $1.86 from $1.85.

In a conference call to reporters last night, EDS chief financial officer Jim Daley touted the company's improvement in new contract signings, which reached $5.7 billion for the quarter and $8.7 billion for the first half of the year.

"New contract bookings are booming," said Merrill Lynch analyst Steve McClellan in research notes. He also said, "It appears EDS may achieve $15 to $20 billion in new business in 1999 vs. $11.8 billion last year."

McClellan rated the company's stock at "accumulate" with a 12-month price target of $70. He kept his fiscal 1999 EPS estimate at $1.86, but also said "it appears EPS may reach $1.90 this year" given that the company's cost cutting efforts are making a quicker-than-expected material contribution.

Yesterday, Plano, Texas-based EDS posted second-quarter earnings a penny ahead of Wall Street's expectations. As reported, the company said operating income was $223.7 million, or 44 cents a share, vs. $221.9 million, or 45 cents a share in its year-ago period. For the quarter, revenue rose 10 percent to $4.6 billion from $4.2 billion.

EDS's Daley said that the company will "likely have a charge in the third quarter" related to its new early-retirement program and further projected layoffs, but also said he doesn't expect the charge to be "unusual in size." He added, "There's some possibility that the charge can be larger that it was in the first quarter, but I would be surprised that it would be three times that size."

Going steadily forward with its restructuring plans, the company announced on Tuesday an early retirement program to about 8,000 eligible employees and also said it plans to further reduce its workforce. EDS said it expects about half of the 8,000 will take a serious look at the offer.

Morgan Stanley's Togut mentioned that the company "stands at the beginning of a powerful long-term earnings turnaround."