On Friday, Stifel, a financial services firm, adjusted its outlook on DXC Technology (NYSE:DXC), reducing its price target to $19.00 from the previous $21.00 while retaining a Hold rating on the company's shares.
The adjustment comes in the wake of the firm's fourth fiscal quarter results, which showed revenues in line with expectations but a 5% year-over-year decline. Despite the revenue dip, DXC's margins and earnings per share (EPS) exceeded forecasts.
The fiscal year 2025 (ending in March) projections for revenue, margins, and free cash flow (FCF) were all below prior expectations. The revenue guidance, indicating a roughly 5% year-over-year decrease, is attributed to several factors including macroeconomic headwinds affecting the consulting sector, a strategic emphasis on profitability leading to more selective outsourcing deals, and existing execution challenges.
The margin guidance reflects a 90 basis point decrease year-over-year, due to slower revenue growth and investments in productivity and operations.
DXC's free cash flow guidance stands at approximately $400 million, which is significantly lower than the typical $750 million per year and falls short of the consensus. This decline in FCF is due to restructuring actions costing $250 million and a shift from leasing to purchasing assets, estimated at around $100 million.
When including capital lease payments, FCF is projected to be about $200 million. The $250 million earmarked for restructuring is not accounted for in the FY25 margin and EPS guidance, with benefits from these actions expected to materialize late in FY25 or FY26, potentially providing a 200 basis point gross tailwind.
The new CEO's immediate priorities include bolstering operating efficiency through restructuring and improving execution, a historical challenge for the company. The CEO is also focusing on high-margin and recurring insurance software and services, which currently make up approximately 8% of DXC's revenue.
The firm views DXC as a "self-help story," with improved execution and cost structure as the primary near-term opportunities and catalysts. Stifel is continuing to monitor DXC's progress for signs of a turnaround but currently believes the stock is fairly priced at 8-9 times FY26 unlevered free cash flow, which implies a 20-25% decrease in adjusted market value.
InvestingPro Insights
The recent analysis by Stifel on DXC Technology aligns with some of the insights available from InvestingPro. Notably, DXC's net income is expected to grow this year, which could signal a potential turnaround for the company, despite a challenging previous fiscal year. This growth expectation is a key highlight for investors considering the company's future prospects. Additionally, the valuation of DXC implies a strong free cash flow yield, suggesting that the company could offer a good value for investors based on its cash generation capabilities relative to its share price.
From a financial standpoint, DXC Technology's market capitalization stands at $3.64 billion, with a price to book ratio over the last twelve months as of Q3 2024 at 1.17, indicating that the stock may be reasonably valued in terms of its assets. The company's revenue for the same period was $13.87 billion, although it experienced a revenue decline of -6.57%. These figures are crucial for investors to consider when evaluating the company's size and performance.
For those seeking further insights and analysis, there are additional InvestingPro Tips available for DXC Technology, which can be explored at InvestingPro. To access these insights and more, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 9 more InvestingPro Tips available, providing a comprehensive look at DXC's financial health and market position.
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