3. DXC Technology Company (NYSE: DXC)
Shares of DXC Technology Company (NYSE: DXC) underperformed in the last twelve months compared to the broader market index. DXC is the third-largest stock holding of value investor’s 13F portfolio valued at $137 million. The firm first initiated a stake in DXC technology during the December quarter of 2019.
Miller Value Partners stated in its fourth-quarter investor letter that DXC is a good stock to buy and hold. Here is what the hedge fund said:
“Finally, I’d like to highlight a holding that we’ve been recently scaling higher, DXC Technology (DXC), a combination of CSC and the Enterprise Service business of Hewlett Packard Enterprise. We are very familiar with the business, having owned both companies at different points in time over the past 15 years. DXC Technology is a Global IT services company that is focused on helping clients with their mission-critical system and leading digital transformation. While the Technology sector has been a market favorite over the past couple of years, DXC has been far from that. The stock price has been under significant pressure, down more than 80% from its post-merger highs as the company ran into integration challenges. DXC’s new CEO, Mike Salvino, has a strong track record in the industry, previously a very successful senior executive at Accenture. His plan for the company has a lot of similarities to successful action steps taken by Maxar Technologies’ (MAXR) new CEO early in their turnaround: focusing on improving key customer relationships and employee morale, selling non-core assets, significantly reducing cost structure, and looking to reduce capital intensity of the business overtime. DXC’s new CEO is also rolling out new cross-selling initiatives, and his significant multi-year cost reduction program will begin in the back half of this year. Upon completion, it has the potential for more than $700M in savings or greater than $2/EPS. Success in implementing the enhancements should allow the company to return to double-digit EBIT margins and mid-high teens ROE supporting normalized EPS greater than $7/share. It’s worth mentioning that DXC peers, Accenture (ACN) and Cognizant Technology Solutions (CTSH), have low to mid-teens EBIT margins and are currently being valued at price–to-sales of 2 to 3 times, while DXC’s market price is currently at a 70% discount to sales! As the turnaround plan improves operating results and returns the company to growth, we believe the valuation discount will begin to narrow between DXC and their peers. The upside potential for DXC is significant and could be multiples of their current share price over the next couple of years.”
