Unisys: Turnaround in the Making?

Jul.23.07 | About: Unisys Corporation (UIS)

Unisys Corp. (NYSE:UIS) is a top player in the information technology [IT] consulting business, providing such services as systems integration, network engineering, project management, and technical support. The company is among the largest government IT contractors, serving local, state, and federal agencies, as well as foreign governments. Other practice groups focus on such sectors as communications, financial services, and transportation. The company also specializes in making high-end servers (under the ClearPath brand).

Unisys fell a long way from the heights of $49.70 in 1999. It bottomed out last year at $4.70. It's moving up again. The question is: can it keep going or is this a little rally that will break investors' hearts and dent their pocketbooks?

There's reason to believe this could be the real thing. Earnings have stopped being negative. In 2005, they were in the red by 47 cents a share. Then in 2006, they went deeper into it with a negative 81 cents a share. But analysts are looking for 15 cents a share, positive, for this year and 45 cents a share next year. In fact, they're predicting earnings will grow by 21% a year, on average, over the next 5 years while revenues only increase by 2.5% a year, on average, in the same time period.

Some of the early gains in those earnings will come from restructuring.&n!bsp; The company released 4900 employees last year. It!39;s identified another 965 unnecessary positions in the services operation, and those people will be gone by the end of this year. Those severances cost $32.7 million in pretax profits in the first quarter of the fiscal year and another $35 million will be taken in the second quarter when added to charges for consolidating certain operations. To counter those costs, the company sold its media solutions business and has an income tax refund. The restructuring should save the company about $360 million annually, starting in the first half of 2008.

While a small profit has shown up for the second quarter in a row, there are some concerns. Service and technology orders were down in the first quarter. However, outsourcing and infrastructure services increased revenues. And, as with many technology companies, some orders slipped past the quarter's closing books, with the anticipation that they would happen in the next one.

The company is focusing its sales efforts on the top 500 U.S. companies and the ten most important foreign countries. There's a new Intel based server, the ES7000, that the company believes will have a meaningful impact on revenues by the second half of this year.

Here are some more of the numbers: Debt is 101% of capital. There is no equity, but it should return by end of the year to be 5 cents a share. Current assets are about 1.2 times current liabilities. There is no dividend. Market cap is $3.2 billion. Net profit margin is working toward 1% this year, to 2.6% next year.

Unisys has a chance to make some real money over the next several years. Costs are down. New products are being introduced. It's worth most investors' time to look a little deeper. But keep in mind that this is a very highly leveraged company with no room for errors if it's going to stay positive in its earnings and make them grow. There's no capital cushion to soften any blows.

Disclosure: Author has no position in stocks mentioned