DXC Technology Has An Upside Of More Than 20%

We believe that DXC Technology’s stock (NYSE: DXC) still has more than 20% upside once the fear around the pandemic subsides. DXC Technology, an IT service provider saw its stock lose around 48% in value so far this year. It traded at a pre-Covid high of $38 in January, and is still below that level. DXC stock has gained 80% from the low of $11 seen in March 2020, after the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. The stock price rose as lockdowns lifted across regions creating a positive market sentiment. Despite the rally in DXC stock since late March, we believe that the stock has more room for growth. Our conclusion is based on our detailed analysis of DXC Technology’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 51% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how DXC and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

DXC Technology vs S&P 500 Performance Over 2007-08 Financial Crisis

DXC stock declined from levels of around $21 in September 2007 (pre-crisis peak) to levels of around $13 in March 2009 (as the markets bottomed out), implying DXC stock lost 40% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $21 in early 2010, rising by 66% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

DXC Technology Fundamentals in Recent Years Have Fallen

DXC Technology’s Revenues rose 176% from $7.1 billion in 2015 to $19.6 billion in 2019, primarily due to its merger with HP Enterprise Services. Despite the rise in revenues, the company’s margins fell from 3.5% to -27.5%, resulting in a EPS fall from $1.82 in 2015 to $-20.76 in 2019. The company’s Q1 2020 (ended June 2020) revenues were 8% below the level seen a year ago, and the EPS figure for the quarter was down to $-0.81 from $0.61 in the prior same period.

Does DXC Technology Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

DXC Technology total debt increased from $8 billion in 2018 to $12 billion at the end of Q1 2020 (ended June 2020), while its total cash increased from $2.6 billion to $5.5 billion over the same period. The company gained $119 million in cash from its operations in the first quarter of 2020.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand and a decline in the number of new cases, and progress with vaccine development buoy expectations

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

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