Unisys (UIS) Downgraded to Underperform

Last year was challenging for information technology (IT) company Unisys (UIS) amidst the acute recessionary environment. The economic downturn has adversely impacted technology spending. Global IT spending declined significantly in 2009. The credit crunch greatly impacted IT capital purchases, and most companies have trimmed their IT budgets. This in turn impacted its top line.

2010 will also be a tough year for Unisys as it works through an uncertain spending environment. Management is currently engaged in a multi-step strategy of reducing costs and focusing resources on high growth areas of the IT market. Although management is making progress in expanding margins, we remain cautiously optimistic of the pace of recovery in IT spending and the maturing of higher-margin legacy product sales and services.

Unisys aims at generating profitability and positive cash flow besides, strengthening its balance sheet in 2010. The recent cost-cutting measures adopted by management should boost the bottom-line but top-line growth looks difficult for the company.

The balance sheet of the company is highly leveraged. As of Mar 31, 2010, the company had $874.4 million of total long-term debt and $468.5 million of cash and equivalents. During the second quarter of 2009, the company launched private debt exchange offers to address $300 million of debt maturing in March 2010. Subsequently, Unisys completed the debt exchange offers and reduced its debt outstanding by approximately $130 million (about 12%).

The stock had taken a hit earlier due to the debt overhang and weak quarterly results. After recovering some of the lost ground in 2009, the stock is again going on a slide, as is evident from the decline in stock price in the last three months. In May, Unisys lost the Transportation Security Administration’s IT infrastructure program bid worth $489 million (over five years) to Computer Sciences (CSC).

Estimates have also gone down significantly in the last three months. The current 2010 EPS estimate is $1.41, down from $2.27 over the past 90 days. Consequently, we downgrade our rating on Unisys to Underperform from Neutral. Our Underperform rating is supported by the Zacks #5 Rank.

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