Shareholders of EDS Corp. (NYSE: EDS) are starting to fidget in their collective seats now that the a shareholder meeting between the company and suitor Hewlett-Packard Corp. (NYSE: HPQ) is scheduled for July 31st. The delay is being brought on by a contingent of shareholders that believes the price H-P will be paying for EDS is, of course, too low.
The shareholders claim that the $25 per share price is too low in addition to a provision that doesn't allow the EDS board to accept higher offers, should one be brought forth. Dallas-area law firm Baron & Budd said "With increased revenues over the past 12 months and 2008 projections on track, the shareholders are questioning why EDS is accepting what many experts consider to be an undervalued share price." Since EDS is headquartered in Plano, Texas -- just outside Dallas -- perhaps some heavy-handed Texas shareholders don't want to sell out to a west coast firm? Who knows.
EDS continues to believe the acquisition by H-P is still in the best interests of the company. A combined HP-EDS would have more than 200,000 employees with operations in more than 80 countries. The combination would form a large challenge to business services and consulting company IBM Corp. (NYSE: IBM) as H-P tries to conquer yet another giant after taking the PC sales leadership crown from Dell, Inc. (NASDAQ: DELL) in 2007.
Hewlett-Packard (NYSE: HPQ), an arch competitor of Dell (NASDAQ: DELL), reported Q2 earnings on Tuesday. Looking through the release, I see quite a few things to like about the H-P story.
Revenues increased 11% to $28.3 billion. This increase was aided by international sales and the weak dollar. On an adjusted basis, earnings per share increased 24% to 87 cents. Furthermore, the adjusted operating margin increased 100 basis points to 10%. Cash generated from operations was $4.8 billion during the quarter, which the release categorized as a record statistic. Cash flow is one of my favorite metrics, and I love it when it is doing well. In fact, according to the transcript of the conference call at Seeking Alpha, the six-month operational cash-flow figure had increased 92% over the comparable time frame one year ago, and free cash flow had more than doubled for the same period.
Honestly, it seems like H-P is managing itself very skillfully, leveraging its various brands in the PC sector to great effect. Guidance calls for adjusted earnings of $3.54 and $3.58. This means that, in my opinion, H-P's stock isn't too expensive. It's also trading away from the 52-week high, which is another positive. Of course, the big story surrounding the company at the moment is its announced acquisition of Electronic Data Systems (NYSE: EDS). As Tom Taulli has observed, the EDS buy is logical. Combining H-P's expertise at providing technologies to the PC world with the services portfolio provided by EDS will most likely make HP an even bigger force, and it could give a behemoth like IBM (NYSE: IBM) new challenges.
It has been a rocky year for Wall Street, but even amid the uncertain market conditions there are some companies that are playing with a lot of cash. In addition, they know how to wisely use their funds, which makes them strong enough to beat any challenge.
One important factor that determines the stability of a company is its corporate cash flow. CNNMoney is looking at stocks with both healthy cash flow and a surplus of cash, which helps them avoid tough situations where they may need to raise their capital (check out its slideshow of these five picks). Another element that CNNMoney takes into account when picking companies is their ability to reinvest cash in ways that assure them a nice profitability.
Let's look at some of the companies that CNNMoney likes:
Oppenheimer & Co reiterated its "outperform" rating on STEC (NASDAQ: STEC) saying that "We remain bullish on STEC's unfolding solid state drive (SSD) story and see further room for shares to run," according to the AP.
Wachovia upgraded Sun Microsystems (NASDAQ: JAVA) from "market perform" to "outperform," according toBriefing.com The news service also writes that Bernstein has downgraded EDS (NYSE: EDS) to "market perform" to "outperform."
National home prices tumbled by 7.7% in the first quarter in a recent survey. While retail sales did fall -0.2% overall in the month of April, the ex-autos numbers were actually positive by +0.5%. Below are the unofficial closing levels for major averages:
Clear Channel Communications Inc. (NYSE: CCU) was up again on news of a settlement between the buyers and the banks for the $20 billion delayed buyout by Bain Capital and THL Partners. The court was adjourned until 2 pm today to allow settlement talks to continue. Shares were up 4% to $34.24 at the end of the day.
MOST NOTEWORTHY: Smith & Nephew, British Sky Broadcasting and Electronic Data Systems were today's noteworthy downgrades:
Smith & Nephew (NYSE: SNN) was cut to Underweight from Neutral at JP Morgan, citing deteriorating fundamentals in several of SNN's key business lines.
Goldman removed British Sky Broadcasting (NYSE: BSY) from its Conviction Buy List and said shares continue to trade at all-time low multiples and that the timing with Sky-Virgin dispute remains unclear. Shares remain Buy rated.
For the past year, Hewlett-Packard (NYSE: HPQ) posted revenues of $107 billion. So, to grow just 5%, the company will need to essentially create another Fortune 500 company.
That's something HP's CEO, Mark Hurd, definitely has mentioned on various occasions. Basically, how can a behemoth continue to grow?
Perhaps a smart strategy is to make big acquisitions?
Well, today HP has announced a hefty $13.9 billion buyout deal for EDS (NYSE: EDS), an information technology (IT) consulting operator. Over the past year, EDS posted about $22 billion in revenues.
But Hurd is not just concerned about the top-line. If anything, he's highly disciplined with generating profits. In fact, since he has come on board HP (back in 2005), Hurd has been masterful in finding efficiencies – while still pushing revenue growth.
While the history of transformative M&A is filled with failures, with the HP-Compaq combination a prime example of what can go wrong, the strategic rationale for the EDS deal makes sense. In today's global environment, customers want strong technologies but also sophisticated services. Actually, companies are increasingly outsourcing services to players like EDS.
Moreover, with much more heft, HP and EDS will become a formidable alternative to IBM (NYSE: IBM), which has proven the technology/services model.
Finally, I'm sure that Hurd will take out his cost-cutting knife. It's something that hasn't been emphasized but I'm sure it will be a big part of the deal.
That's because EDS and HP would under perform in services when it comes to profitability. EDS's bigger business earned a 1% net profit margin in the first quarter. But HP's services business generated a far higher 9% estimated net margin. Unfortunately -- for reasons described below -- the combined company will probably have lower margins.
Meanwhile, IBM's profit lagged HP's slightly -- it made an estimated 7% net margin in the first quarter in its services business. But IBM is and will remain a much bigger player. Combined, EDS and HP's services business will control 5.3% -- lagging IBM. That's because IBM controlled 7.2% of the tech-services market in 2007 while EDS was a distant second at 3% and HP was fifth, with a 2.3% share.
This gigantic beat also serves to remind us of the big dichotomy. You are either in the energy and petroleum products game or you are in a lot of games that don't work.
It's not easy for these companies, some of which have lived off the duress of state and local governments, including Shaw (NYSE: SGR) (Cramer's Take) and to a certain extent Aecom (NYSE: ACM) (Cramer's Take) and URS (NYSE: URS) (Cramer's Take), to become oil-and-gas plays.
The only ones that have transcended it beside Fluor are Foster Wheeler (NASDAQ: FWLT) (Cramer's Take) and Jacobs Engineering (NYSE: JEC) (Cramer's Take), and the only reason you would really know that is longevity. I remember in the early 1980s when FLR and then FWC would compete directly for all of the huge projects after the second oil shock.
By looking at other companies that sell services and PCs, it has occured to Hewlett-Packard (NYSE: HPQ) that the hardware business is getting more competitive and that margins are moving down, But hardware is still the largest revenue center at the big tech company, and that may be the single greatest failing of the current management. It has not created large enough software and services businesses to match the hardware sales.
HP brings in less that 25% of its revenue from services. But that business is growing quickly. According to the company's 10-Q, it had revenue of almost $4.4 billion in the first quarter. In the same period a year ago, that number was $3.9 billion.
The prevailing theory is that HP plans to buy EDS (NYSE: EDS) for $12.6 billion for its revenue from consulting and outsourcing to better compete against IBM (NYSE: IBM). That may be true, but the actual reason may be much more simple than that. With its stock up 50% over the last two years, HP needs a new business to keep its revenue growing and its shareholders happy. That is not going to come from its ink and printer business. Buying EDS almost guarantees another two years of rising revenue and earnings.
Douglas A. McIntyre is an editor at 247wallst.com and the author of the Ten Stocks Under $10 letter.
Gas Crunch Hits Home The record-high price of gasoline is putting a strain on American motorists - and spurring some to shift their habits. Here are their stories. America's Money: Gas crunch hits home - CNNMoney.com
12 Ways to Make Your House a Cash Cow Want to earn some extra cash? Turn your home into a money-making machine. As times get tighter, many are looking for ways to save. Here are offbeat ways to bring in cash without leaving home. These include take in renters, have yard sales, throw party sales or share your garage. 12 ways to make your house a cash cow - Bankrate.com
Merrill Lynch upgraded Sirius (NASDAQ: SIRI) to "neutral" from "sell" according toBriefing.com. The news service also reports that Citigroup downgraded EDS (NYSE: EDS) from "outperform" from "market perform".
Goldman Sachs downgraded ITV to "sell" from "neutral," according toMarketWatch.
U.S. stock futures fell Tuesday morning even after (or perhaps because) Wal-Mart reported a 7% profit rise, slightly above analyst estimates. But investors also awaited several economic indicators due out today as well as speeches from several of the Federal Reserve members.
U.S. stocks finished the day with strong gains Monday thanks to a drop in crude oil futures and several deal speculations that hit the Street. The Dow industrials went up 130 points, or 1.02%, the Nasdaq Composite was up 42 points, or 1.76%, and the S&P 500 finished the day 15 points, or 1.10%, higher.
At 8:30 a.m. EDT April export and import prices as well as retail sales data are due. Economists expect retail sales to have declined 0.2%, and excluding autos, they expect sales to have increased 0.2% in the month. The difference in the two gauges isn't surprising as higher gasoline prices were bound to put consumers off buying cars. At 10:00 a.m. EDT, March business inventory levels are due.
But other than raw data, seven Fed members are also scheduled to give speeches, including one from Fed Chairman Ben Bernanke in Atlanta on the central bank's liquidity measures.
The WSJ reported HPQ is in advanced talks to acquire Electronic Data Systems (NYSE: EDS) for between $12 billion and $13 billion according to sources.
HPQ call option volume of 59,863 contracts compares to put volume of 21,209 contracts. HPQ June option implied volatility of 35 is near its 26-week average of 33 according to Track Data, suggesting slightly larger price risk.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Shareholders of EDS Corp. (NYSE: EDS) are starting to fidget in their collective seats now that the a shareholder meeting between the company and suitor Hewlett-Packard Corp. (NYSE: HPQ) is scheduled for July 31st. The delay is being brought on by a contingent of shareholders that believes the price H-P will be paying for EDS is, of course, too low.
It has been a rocky year for Wall Street, but even amid the uncertain market conditions there are some companies that are playing with a lot of cash. In addition, they know how to wisely use their funds, which makes them strong enough to beat any challenge.
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U.S. stock futures fell Tuesday morning even after (or perhaps because) Wal-Mart reported a 7% profit rise, slightly above analyst estimates. But investors also awaited several economic indicators due out today as well as speeches from several of the Federal Reserve members.
Hewlett-Packard
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