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Big Navy deal boosts EDS shares

Shares of Electronic Data Systems jump nearly 15 percent after the services giant lands a multiyear government outsourcing contract with a hefty $6.9 billion price tag.

Shares of Electronic Data Systems jumped nearly 15 percent Monday after the services giant landed a multiyear government outsourcing contract considered the largest in history with a hefty $6.9 billion price tag.

Shortly after the morning bell, EDS, whose shares have fallen 39 percent this year, got a much-needed boost. The company's shares advanced $6.06 to $46.69, rising further above their 52-week low of $38.37.

The U.S. Navy on Friday announced EDS as the sole contractor of the Navy-Marine Corps Intranet, or NMCI, project. The government outsourcing contract calls for EDS and its team, which includes WorldCom and Raytheon, to provide the computers, phones, fax machines and anything else related to providing faster voice, video and data communications.

Other bidders in what analysts have called a landmark outsourcing deal included professional services heavyweights Computer Sciences (CSC) and IBM Global Services, as well as defense contractor General Dynamics.

CSC, which was favored by several analysts as a leading contender, took the hardest hit among the group on news of its defeat. Shares of CSC dropped $8.31, or nearly 11 percent, to $68.75 a share. IBM and General Dynamics also fell on the news. IBM shares slipped $1.13 to $114.88, and General Dynamics inched 50 cents lower to $59.94.

Merrill Lynch analyst Stephen McClellan upped his stock rating on EDS to "buy" from "accumulate" and increased his 12-month price target to $56 from $40.63 a share.

In research notes McClellan said it was a "major surprise" that EDS won the deal and that the contract will help boost the company's revenue going into 2001. McClellan had earlier pointed to CSC as a top choice because of the company's strong record with federal contracts.

"Revenues have been lackluster" for EDS, McClellan said. "Investors have awaited evidence of a return to healthier growth. This huge NMCI contract represents a big leapfrog in terms of somewhat more robust revenue prospects ahead."

EDS executives during a conference call earlier Monday said the Navy win is a "huge victory" for the company and will help boost incremental revenues annually beginning in the second half of 2001, when the demands of the contract are expected to accelerate.

The deal also will help position EDS at the center of more government outsourcing contracts for years to come, said chief executive Dick Brown.

In research notes, Salomon Smith Barney analyst Patrick Burton said he expects the Navy project will give EDS about $100 million in revenue each quarter. Still, he added that it will most likely take six to nine months for EDS to gain steady revenue streams from the contract.

Burton reiterated his "buy" rating on EDS' stock and maintained a $75 per share price target.

The NMCI project will entail the development and maintenance of a government intranet that will link about 100 existing networks worldwide, tying together some 360,000 Navy and Marine personnel by giving them access to a common intranet and multiple databases.

In addition to partners Raytheon and WorldCom, subcontractors include Cisco Systems, Wamnet, Dell Computer and Microsoft.

EDS said it intends to subcontract 40 percent of the project to small and minority-owned businesses, which exceeds the Navy's requirements of 35 percent.