By Melvin Pasternak
This could be a tough year for Unisys Corp (NYSE: UIS).
As a global information technology (IT) company, Unisys conducts IT outsourcing, systems integration and computer infrastructure maintenance for government agencies, commercial organizations and financial companies worldwide.
However, with the evolution of computer server and hardware technologies, demand for Unisys' legacy servers and IT hardware systems has fallen. And since there has been weakness in the overall IT market, many of Unisys' clients have cut their IT outsourcing and purchasing budgets.
As a result, Unisys has seen in a large drop in sales this year. In response, the company has been forced to make cuts to some operations, further impacting sales.
Unisys is scheduled to report second-quarter results on Tuesday. The outlook is unfavorable. Analysts expect both revenue and earnings to show declines.
Technically, UIS appears to be vulnerable and faces nearby resistance.
After hitting a low of $2.80 in March 2009, UIS entered a steep uptrend, surging to resistance near $16.40 the following month.
As the stock continued its ascent throughout 2009, a major uptrend line formed.
In both December 2009 and March 2010, UIS tested resistance near $40. That failure to penetrate resistance set up a potential double top, which the stock completed when it fell below $28.68 support on weak first-quarter results. During its fall, UIS broke the major uptrend line from its April 2009 high.
While UIS broke an intermediate downtrend line last Friday, it still faces stiff nearby resistance at current levels. Further resistance is in the mid-$25 range, the area of its mid-May recovery highs. A minor uptrend line drawn from the early July $17.04 low intersects the chart at $21.80.
Despite the recent rally, the stock is well below the falling 30-week moving average, which intersects at $30.07.
Important support dating back to March 2009 is near $17.
The indicators are mixed. MACD is on a sell signal. Although the MACD histogram appears to have crested, it remains in negative territory.
In December 2009, the major relative strength index uptrend was broken. It is now in a downtrend and falling. At 45.5, it is below the key 50 juncture, but not deeply oversold.
Indicative of the stock's weakness, stochastics appears to have found support in deeply oversold territory. Weak stocks can become and stay oversold for long periods of time. For the past three months, %K has leveled off near 19.8, while %D has remained near 12. Stochastics is currently close to giving a buy signal, but both %K and %D would need to surpass 20 to do so. However (as the dashed circles show) in the past when a buy signal was given, the stock's rallies were muted.
In addition to displaying technical vulnerability, Unisys also has a poor fundamental outlook.
In late April, the company reported disappointing first-quarter 2010 results that were below analysts' expectations. According to Thomson Reuters, analysts' expected the company to generate revenue of $1.1 billion, as it did in the first quarter of 2009. However, first-quarter 2010 revenue fell -9% to $998 million.
Analysts' project second-quarter revenue will fall nearly -10% to $1.0 billion, compared with $1.1 in the year-ago quarter.
As demand for UIS' products and services continues to drop, the outlook for the full 2010 year remains poor. Analysts expect revenue will fall more than -11% to $4.1 billion, compared with $4.6 in the full 2009 year.
The earnings forecast is also shaky.
In the first-quarter of 2010, Unisys' earnings fell -60% to $0.27 per share, compared with $0.66 in the first-quarter of 2009. In part, negative currency translation, especially of the Venezuelan bolivar, contributed to the large decline.
For the second quarter, analysts expect earnings to fall -47% to $0.53, compared with $1.00 in the year-ago quarter.
Three months ago, analysts projected full-year earnings of $2.27. These estimates have since been substantially reduced. Analysts now expect the company's earnings to fall to $1.47. This is at least a -69% drop compared with $4.75 in 2009.
In addition, the company is also richly valued, based on its 5-year expected price/earnings-to-growth ratio (price/earnings divided by earnings growth rate).
Unisys' 5-year PEG is 1.9. In comparison, competitor Hewlett-Packard (NYSE: HPQ) has a 5-year PEG of 1.0. And International Business Machines (NYSE: IBM) has a PEG of 1.1. The closer the PEG to 1, the better the valuation.
Given that UIS is fundamentally weak and shows technical vulnerability, I would suggest that investors short the stock if it breaks the current minor uptrend line.
Disclosure: Neither Melvin Pasternak nor StreetAuthority, LLC hold positions in any securities mentioned in this article.