Investing in private equity's next frontier

Posted May 21st 2007 10:50AM by Peter Cohan
Filed under: Rumors, Private Equity, Electronic Data Systems (EDS)

With the market being propelled upward due to private equity and corporate acquisitions, investors should not stay on the sidelines. Rather, they should target private equity's next frontier -- IT services. Of the companies in this sector, Unisys Corp. (NYSE: UIS), Perot Systems Corp. (NYSE: PER) and Ingram Micro, Inc. (NYSE: IM) may be worth examining.

A few months ago, I suggested several sectors and companies that private equity could target next. On Friday, TheStreet.com reiterated one of those sectors -- IT services. Here's how much seven such companies have gone up or down since my March 29th post along with their market capitalizations ranked by their Price/Earnings to Earnings Growth (PEG) ratios:

UIS declined 2% from $8.48 (market cap: $2.9 billion). PEG 0.3 based on a forward P/E of 42.1 and 149.5% earnings growth to $0.49 in 2008.
PER declined 8% from $17.85 (market cap: $9.9 billion). PEG 1.1 based on a current P/E of 25 and 23.62% earnings growth to $1.05 in 2008.
IM increased 4% from $19.27 (market cap: $3.4 billion). PEG 1.2 based on a current P/E of 14.3 and 11.5% earnings growth to $1.87 in 2008.
Affiliated Computer Services, Inc. (NYSE: ACS) increased 0.4% from $59.01 (market cap: $5.9 billion). PEG 1.2 based on a current P/E of 21 and 18.3% earnings growth to $3.73 in 2008.
Accenture Ltd. (NYSE: ACN) increased 3% from $38.68 (market cap: $30.9 billion). PEG 1.5 based on a current P/E of 19.3 and 13.2% earnings growth to $2.18 in 2008.
Electronic Data Systems Corp. (NYSE: EDS) increased 1% from $27.88 (market cap: $14.4 billion). PEG 1.8 based on a current P/E of 24.2 and 13.8% earnings growth to $1.79 in 2008.
Computer Sciences Corp. (NYSE: CSC) increased 10% from $52.31 (market cap: $9.9 billion). PEG 2.6 based on a current P/E of 29.1 and 11.2% earnings growth to $4.07 in 2008

Regardless of whether the top three get bought out by private equity firms, their shares may be worth purchasing. Since rumors of a buyout are rife, I'd look at CSC as well.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.

Tags: accenture, acn, acs, affiliated computer services, AffiliatedComputerServices, computer sciences corp, ComputerSciencesCorp, csc, eds, electronic data system, ElectronicDataSystem, im, ingram micro, IngramMicro, per, perot systems, PerotSystems, uis, unisys