Submitted by Saul Sterman, CrossProfit.com
On
Tuesday 1/23/07
, Goldman Sachs downgraded Unisys from hold to sell. We all know that it is indeed rare for GS, or any other Wall Street firm for that matter, to utter the word ‘sell’. What we found interesting is the timing. Unisys was due to announce earnings the following day,
1/24/07
, for Q4 2006. Did Goldman Sachs know something?
We waited for the figures and just in case they did know something, we unsuccessfully attempted to open a small short position. After taking a look at the figures we figured out why Goldman Sachs is saying SELL. The market however looked the other way. The catchy headlines emphasize the ‘turn around’ as Unisys went from a loss to a quarterly profit.
The bottom line is that Unisys is downsizing and in a big way. The only way to temporarily squeeze out a meek paltry profit over the next few quarters is to continue cutting costs (a.k.a. downsizing) to a greater extent and mask the loss of revenue and the decline in profit margins. No one seems to care or mention that the so called profit is only $0.06 per share!
The cut in R&D is greater than the entire profit yet the company would have you believe that it is somehow miraculously restructuring, thus increasing its margins. Not only has Unisys cut $30M from R&D but has simultaneously cut thousands of jobs. There is literally ZERO revenue growth from 2005. This is the case for both the quarterly and annual comparison. Don’t be fooled by the spin. The bottom line is as follows;
Year Ended
December 31, 2006
------------------
Eliminations
Total Services Technology
Customer revenue $5,757.2 $4,917.2 $840.0
Inter-segment ($250.3) 14.8 235.5
-------- -------- -------- --------
Total revenue $5,757.2 ($250.3) $4,932.0 $1,075.5
======== ======== ======== ========
Gross profit percent 17.5% 15.1% 44.2%
======== ======== ========
Operating profit
/ (loss) percent (5.7%) (0.5%) 1.7%
======== ======== ========
Now compare the 2006 figures with 2005 below!!!
Year Ended
December 31, 2005
------------------
Customer revenue $5,758.7 $4,788.5 $970.2
Inter-segment ($259.6) 18.7 240.9
-------- -------- -------- --------
Total revenue $5,758.7 ($259.6) $4,807.2 $1,211.1
======== ======== ======== ========
Gross profit percent 20.2% 12.1% 48.4%
======== ======== ========
Operating profit
/ (loss) percent (2.8%) (4.3%) 4.2%
* Revenue is stagnant
* Operating loss increased from 2.8% in 2005 to 5.7% in 2006
* Gross profit declined from 20.2% to 17.5%
Perhaps less important financially, yet drives home the Goldman downgrade message, is the “Stockholder’s deficit” figure on the balance sheet, tripling from 32M to 96M in 2006. This is not a sign of a turnaround by any measure. You can spin a ‘downsize’ anyway you want, but eventually it catches up with you. Unisys is contracting.
On
1/25/07
, Goldman Sachs upped their earnings estimates yet at the same time conspicuously highlighted that they maintain their SELL recommendation! – get it? Further proof that UIS is masquerading as a profitable company is found in their latest SEC filing. Don’t you love creative accountancy 101? Once revenues start to drop, the only way to maintain ‘profitability’ is to fire a few thousand more, which in turn exacerbates the situation.
We were able to short today at 8.20.
MMI successfully accumulated 6% of UIS at an average price of $6.48. I wonder if they are still holding their position as reported on
9/30/06
. Even if the stock pulls back only to $7.50, which is more in line for a zero growth stock with a $0.35 maximum forward EPS, MMI is still way ahead of the game.
One last trivial tidbit to take into account is that UIS relies on IBM’s hardware sales to a certain degree. IBM has recently given negative guidance for this division for 2007. Woops.
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