Unisys (UIS) is the ultimate old technology company, and when its name popped up in a recent screen, I almost ignored it.
Earlier this week, I sat down to run my usual series of stocks screens. As markets have been declining I am, of course, interested to see what potential bargains may have been created.
In addition to my usual price-to-book value screens, I have recently started including a regular scan for stocks that trade at a very low multiple of enterprise value-to-EBIT. Having read Tobias Carlisle’s excellent books, Quantitative Value and Deep Value, and having had several long talks with Tobias about valuations, I am convinced that the EV/EBIT measure is as good as price-to-book, and it is now an important part of my arsenal.
When I ran it this week I came cross a name from the dark ages that is now worth consideration.
I have not spent a minute thinking about Unisys in a very long time, and in all honesty, I wasn’t initially all that interested despite its EV/EBIT ratio of just 5.6. Still, Unisys was on the list, so I figured I would spend a few minutes doing some investigation before I dismissed UIS.
The more I read, the more interested I became.
Why Unisys Looks So Good
Unisys might be an old tech company, but it has a presence in all the hot markets of today, including cloud computing and cybersecurity. UIS is winning contracts and has added some talented new executives over the past year.
I was interested enough to make some calls to friends — who like myself are terrified of actual work, so they sell software to governments and large corporations — to get their take on Unisys. The general consensus was that UIS had some great products, but they were very horizontal in their sales approach. They would walk in and take the easy “need right now” low-margin sale and totally ignore the fact that with a little time and effort, they could have sold four of five other much higher-margin products to the same customer.
Also, Unisys has been around forever plus a few weeks, so there was an entrenched bureaucracy and cost controls were not as strong as they needed to be.
But that’s changing. At the start of this year, Peter A. Altabef took the role of CEO at Unisys. Mr. Altabef is not a stranger to fixing a neglected technology company. He was previously CEO of Perot Systems and Micros Systems (MCRS). In both cases, he reversed the downward trajectory of the business and oversaw the sale of the company that resulted in huge profits for patient shareholders.
Altabef appears to be on the path to execute the same types of changes and improvements at Unisys. Right away he made it clear that changes were coming when he said on his first shareholder conference call, “I’m confident of Unisys’ capabilities and potentials, but we must move aggressively to accomplish our goals of achieving competitive margins, enhanced cash flow and revenue growth.”
He was clearly serious about being aggressive, as the company is taking $300 million in charges to restructure the business; they’ll hit the bottom line over the next year and be fully reflected by the end of 2016. These changes are going to result in $200 million of cost savings.
Considering that there are just 49 million shares of UIS stock, and that most of that $200 million should hit the bottom line, we’re talking about an earnings boost of as much as $4 per share. Unisys has about $880 million of net operating losses and tax credits, so the tax man won’t get much, if any, of the money. That is an enormous earnings increase without any revenue growth.
And there’s a very good chance Unisys will be able to deliver solid revenue growth over the next few years.
UIS’ Stealth Cybersecurity software is highly regarded and has won a bunch of industry awards. Banks in particular should be a great market for this product, as every banker I know is deeply concerned about cybersecurity issues and a ton of money is going to be spent on cybersecurity products in the near future. Uniysis gets 22% of its business from financial services, and this industry is expected to be among the biggest spenders for IT products in general and cybersecurity in particular. Unisys is actually very well-positioned to gain a lot of the spending.
The opportunity in government contracts is also huge both in the United Sates and internationally. Unisys has best-in-class products that are used in law enforcement, critical infrastructure protection, health and human services and Immigration and Border Control. These are huge markets and again, Unisys is well-positioned to a large revenues and profits from increased government spending on IT services in the years ahead.
Mr. Altabef has some challenges in turning Unisys around, but he is off to a good start. He has done it before, and reading the recent filings and talking to his competitors, I think he will do it and succeed for the third time in his career.
If I look at the potential earnings from the cost savings and revenue gains in key markets, I believe UIS stock could easily go back to the 2010 highs. That would be more than three times the current stock price — a huge win for aggressive (but patient) investors.
As of this writing, Tim Melvin planned on initiating a position in UIS.