DXC Technology

Ticker
$DXC
Industry
Technology
Type
Turnaround
Rating
Covered
Category
General
Target Price
$41.50
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DXC is an IT services provider merged from Computer Sciences Corp and HP’s IT services business back in 2016-2017. They had an excellent run from cost cutting initiatives which backfired in 2019-2020. Since then, new management has entered the picture with a turnaround plan.

As of early 2022, the stock is all about the turnaround and long-term guidance — $5+ in EPS and $1.5bn FCF on a <$30 stock price.

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Notes

Revenue trends over the past few quarters (3Q22 = 12/31/21)
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Turnaround — Revenue still declining but overall trends improving since FY21
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Capital allocation — Debt paydown (especially via asset sales), now turning to buybacks
  • Debt repayment was the focus in FY21-22
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  • Buybacks are starting to ramp in FY22-23
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Historic valuation — 5yr average P/E multiple of 8.3x; at $25/share, stock is trading at 5x or less FY24 guidance
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Financials & Valuation

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2Q22 — There are 230m shares outstanding x $25/share = $5.75bn market cap. Net debt is ~$2.6bn for an $8.4bn enterprise value. FY24 guidance is $5-5.25 in EPS and $1.5bn FCF. Analyst EBITDA estimates are $2.3bn. Historically, the stock has traded at 8.3x earnings which would be $41.50/share target price. $IBM in a similar position to DXC and historically traded at 11x earnings.

Resources

August 2022 — Turnaround still in action, long-term guidance intact

The June 30 quarter was fiscal first quarter of 2023 for DXC (1Q23). The big news was a guidance cut for EPS, FCF, and revenue growth. EPS is expected at $3.45-3.75 vs. $3.85-4.15 and FCF is $700m vs. $800m. Importantly, FY24 guidance was maintained — $5-5.25 EPS and $1.5bn FCF.

Buybacks are still ramping up — $266m spent (~$30/share) in 1Q23 and another $500m remaining on repurchase authorization.

At the 5yr average P/E of 8.3x, DXC would be worth $41.50 based on $5 in FY24 EPS (forward 12-month). Given the balance sheet is already at the target leverage ratio, management has all FCF available to deploy into buybacks or other value-creating areas.

July 2021 — VDL: quick value
April 2021 — The dentists’ tweets on the $DXC situation
March 2020 — VDL: initiation