Affiliated Computer: Countercyclical Focus Thrives in Tough Times

Affiliated Computer Services (ACS) provides business process outsourcing and IT outsourcing services for commercial and government clients.

About 85% of revenues come from recurring, long-term deals. Customers such as the US Department of Education (Direct Student Loan servicing) and New York State (E-Z Pass automated toll collection) are stable and hard to displace. Clients like these have helped ACS to win similar contracts with other governments, contributing to margins as the expertise of running one program can be leveraged to another similar program.

Estimates are likely to hold even as those of so many other companies get cut. About one half of the government segment is tied to federal government funded needs-based programs. It trades at roughly 14x the current consensus estimate for the year ending this June, below its historical range of 17-27x earnings.

With the company having generated over $4.00 per share in free cash, the stock trades at about an 8% free cash flow yield. The free cash has been sensibly allocated toward share buybacks; share count declined 22% from fiscal year 2005 to 2007 (fiscal year ends in June).

Disclosure: Author has a long position in ACS