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, Barel Karsan (370 clicks)
Long only, deep value, contrarian, bonds
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Global IT company Unisys (NYSE:UIS) has all the makings of a value stock. Its net cash position of $330 million provides safety in the event of a downturn and offers strong downside protection on the company's $760 million market cap. In recent years, the company has managed annual income of $200 million; it will not earn as much this year thanks to cutbacks in government spending, but the company remains solidly profitable.

Since a good portion of this company's revenues come from deficit-laden governments (e.g., 17% of Unisys' 2011 revenue came from various agencies of the U.S. federal government), one might expect this company to be revenue-challenged going forward. But it appears as though the market has overreacted to the pessimistic side, as Unisys trades at a P/E of 6 despite a healthy net cash position.

But all is not what it appears to be. As per the company's notes to its financial statements, the company's pension fund is a whopping $1.5 billion in the hole. This means it will take many years of earnings to cover this shortfall, leaving shareholders little in the way of returns, but a whole lot in the way of risks.

Suddenly, the company's negative revenue outlook looms large, as fewer dollars will be available to cover what will amount to large pension expenses. In the next three years, the company will have to inject an estimated $35 million, $100 million, and $170 million, respectively, into its pension fund to meet its funding targets. If the company's pension assets fail to meet their expected returns of 7%-plus (which is a high probability considering current interest rates), expect these funding requirements to be revised upward.

This serves as a perfect example of why investors cannot rely solely on screens to make investment decisions. A shrinking company with legacy pension assets makes for a situation in which a considerable amount of the company's profits must be diverted from shareholders. As such, Unisys looks like a great company to have retired from, but not a great company one should look to own considering these liabilities.

Disclosure: No position.

Source: Unisys: All The Makings Of Value