On Friday, Morgan Stanley (NYSE:MS) adjusted its outlook on DXC Technology (NYSE:DXC) shares, reducing the price target from $21.00 to $18.00, while maintaining an Equalweight rating on the stock.
The firm's analysis suggests that the adjustment reflects a roll forward of valuation to the fiscal year 2026 from the previous fiscal year 2025, coupled with a re-rating of peer multiples.
DXC Technology's price target has been recalibrated based on a 6x multiple on the revised Base Case Earnings Per Share (EPS) estimate for fiscal year 2026.
This multiple is consistent with the company's three-year average two-year forward Price-to-Earnings (P/E) multiple. The revision comes amidst a backdrop of consecutive outlook revisions and execution challenges in the quarter.
The firm acknowledges the progress DXC is making but emphasizes that the company's fundamental turnaround is expected to be a gradual process.
The analyst's comments underscore that while there are positive developments, the consistent revisions to the company's outlook and its performance within the quarter underscore the view that a fundamental recovery will take time.
Investors are advised to observe DXC Technology's performance for a longer period to gauge the consistency of the company's turnaround efforts.
This cautious stance is partly due to DXC's significant exposure to the Information Technology Outsourcing (ITO) market, which is considered to be in secular decline.
The revised price target and the ongoing assessment of DXC Technology's market position reflect a measured approach to the company's stock, suggesting that investors may remain on the sidelines until there is more evidence of sustained improvement in the company's operations.
InvestingPro Insights
Recent data from InvestingPro shows that DXC Technology (NYSE:DXC) is navigating through challenging times with a market capitalization of $3.64 billion and a negative P/E ratio of -8.9, indicating that the company has not been profitable over the last twelve months as of Q3 2024. Despite this, analysts are optimistic, expecting net income growth this year. This aligns with Morgan Stanley's perspective on the company's gradual recovery.
InvestingPro Tips highlight that DXC Technology is a prominent player in the IT Services industry, trading at a low revenue valuation multiple, which could present an opportunity for investors. The company's valuation implies a strong free cash flow yield, suggesting potential for future financial flexibility. However, it's worth noting that the company suffers from weak gross profit margins at 22.65%, and stock price movements have been quite volatile, with a year-to-date price total return of -13.07%.
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