PRSP - Perspecta

[walkie518]

Perspecta just spun from DXC and, as usual, the spin is getting sold off.

 

Former DXC management is leaving DXC to join the spin-off, and from what I understand, Perspecta in many ways may have wound up with the better half. 

 

Anyone following this one?

[Foreign Tuffett]

Perspecta just spun from DXC and, as usual, the spin is getting sold off.

 

Former DXC management is leaving DXC to join the spin-off, and from what I understand, Perspecta in many ways may have wound up with the better half. 

 

Anyone following this one?

 

Actually, DXC CEO Mike Lawrie is staying at DXC. Lawrie will be Chairman of the Board for Perspecta, but the CEO is coming from Vencore.

[walkie518]

Perspecta just spun from DXC and, as usual, the spin is getting sold off.

 

Former DXC management is leaving DXC to join the spin-off, and from what I understand, Perspecta in many ways may have wound up with the better half. 

 

Anyone following this one?

 

Actually, DXC CEO Mike Lawrie is staying at DXC. Lawrie will be Chairman of the Board for Perspecta, but the CEO is coming from Vencore.

 

So Lawrie will not be spending more time at Perspecta? 

 

On the flip side, if Lawrie wanted to still be in charge, why spin?  I suppose the thesis might be that he stands to make a lot more money as the two entities grow side-by-side?

 

[valuedontlie]

Perspecta just spun from DXC and, as usual, the spin is getting sold off.

 

Former DXC management is leaving DXC to join the spin-off, and from what I understand, Perspecta in many ways may have wound up with the better half. 

 

Anyone following this one?

 

Actually, DXC CEO Mike Lawrie is staying at DXC. Lawrie will be Chairman of the Board for Perspecta, but the CEO is coming from Vencore.

 

So Lawrie will not be spending more time at Perspecta? 

 

On the flip side, if Lawrie wanted to still be in charge, why spin?  I suppose the thesis might be that he stands to make a lot more money as the two entities grow side-by-side?

 

These Gov't IT service providers (BAH, CACI, LDOS, etc.) trade at much higher multiples (18-19x earnings / 11x EBITDA) relative to legacy DXC/CSC (10x / 6x)...

 

Lawrie made this exact move in the past when he spun CSRA out of CSC... The guy has created a lot of value over the past decade...

[Spekulatius]

How do they get their 16% margins when competitors get around 10%? the margin improvement is relatively recent and last years margin was around 10%. this years pr forma EBITDA is heavily adjusted due to a prior merger.

 

While I don’t have pro forma stand alone financial, this seems very indebted. DXC has just  issued a note at 7.45% interest rates, that deep into junk nowadays.

 

Having one customer (US government) is risky, if they ever put your on notice for misconduct or lack of performance, watch out below.

 

This may work out, but I think it is a very risky spinoff.

[Foreign Tuffett]

How do they get their 16% margins when competitors get around 10%? the margin improvement is relatively recent and last years margin was around 10%. this years pr forma EBITDA is heavily adjusted due to a prior merger.

 

While I don’t have pro forma stand alone financial, this seems very indebted. DXC has just  issued a note at 7.45% interest rates, that deep into junk nowadays.

 

Having one customer (US government) is risky, if they ever put your on notice for misconduct or lack of performance, watch out below.

 

This may work out, but I think it is a very risky spinoff.

 

Where are you seeing the bolded? The only debt I see that matches that description was issues by a predecessor company long ago.

 

Also, Perspecta works with lots of different government agencies, so the customer base isn't as monolithic as it might appear at first glance. From the Form 10: "With minimal revenue overlap across USPS and Vencore, and a well-diversified customer base"

 

[Spekulatius]

Foreign Trüffel, you are correct. DXC or PRCP didn’t issue 7.45% notes. I misinterpreted and exchange offer for 7.45% notes. It still looks like there is quite a bit of leverage with this stock,but I have not been able to gather the pro formafinancials in detail yet.

[walkie518]

Foreign Trüffel, you are correct. DXC or PRCP didn’t issue 7.45% notes. I misinterpreted and exchange offer for 7.45% notes. It still looks like there is quite a bit of leverage with this stock,but I have not been able to gather the pro formafinancials in detail yet.

 

some proforma info attached...of course, there hasn't been a full quarter so no Qs or Ks, but if we believe in efficient markets (most of the time) DXC went from $100 to $84/sh thereby erasing ~$4.3B of mcap post spin.  Perspecta's current market cap is $3.8B.  The 13% difference, one might argue, is the market digesting the spin. 

 

This is certainly not a rigorous analysis of Perspecta's proforma, but offers some broadstrokes into market reaction and valuation (or under valuation).

DXC_Announcement_presentation.pdf

Perspecta_Investor_Day_Reconciliations_2018_05_14.pdf

Perspecta_Investor_Day_Transcript_2018-05-14.pdf

[walkie518]

Perspecta just spun from DXC and, as usual, the spin is getting sold off.

 

Former DXC management is leaving DXC to join the spin-off, and from what I understand, Perspecta in many ways may have wound up with the better half. 

 

Anyone following this one?

 

Actually, DXC CEO Mike Lawrie is staying at DXC. Lawrie will be Chairman of the Board for Perspecta, but the CEO is coming from Vencore.

 

So Lawrie will not be spending more time at Perspecta? 

 

On the flip side, if Lawrie wanted to still be in charge, why spin?  I suppose the thesis might be that he stands to make a lot more money as the two entities grow side-by-side?

 

These Gov't IT service providers (BAH, CACI, LDOS, etc.) trade at much higher multiples (18-19x earnings / 11x EBITDA) relative to legacy DXC/CSC (10x / 6x)...

 

Lawrie made this exact move in the past when he spun CSRA out of CSC... The guy has created a lot of value over the past decade...

 

Booz trades at 1x sales with ~5% net margins; SAIC trades at .76x sales with 4% net margins; Leidos trades at .89x sales with 4% net margin; CACI trades at .94x sales with a 6.6% net margin.

 

It seems a little unclear what fiscal year 19 is without the first Q or K?  Assuming we are in fiscal 19, Perspecta is guiding to $4.2B. 

 

Without doing a ton more diligence here but using the lowest multiple to sales of the comps above, $3.2B would be an appropriate market cap and using the highest would yield a $4.2B market cap...pretty big difference, though one should note that Booz's EBITDA margins (~10 %) are 33% less than Perspecta's. 

 

Is Perspecta worth 33% more than whatever that multiple might be?  I would think Perspecta should at least trade in line w/Booz given the former's size and margins?

 

Booz trades at 17x cash from operations and 21x gaap net income; SAIC trades at 16x cash from ops and 20x gaap net income;  Leidos trades at 17x cash from ops and 23x gaap net income; CACI trades at 13x cash from ops and 14x gaap net income. 

 

Averaging these we find 16x cash from ops and 20x gaap net income multiples.  It's likely that should Perspecta keep its Navy contract, which appears to be a reasonable assumption, we should see PRSP trade at least on average...0.9x sales reads ~$3.8B before factoring any sales growth or substantively greater margin than peers. 

 

Is this not interesting that to anyone else? 

 

 

[Foreign Tuffett]

Perspecta just spun from DXC and, as usual, the spin is getting sold off.

 

Former DXC management is leaving DXC to join the spin-off, and from what I understand, Perspecta in many ways may have wound up with the better half. 

 

Anyone following this one?

 

Actually, DXC CEO Mike Lawrie is staying at DXC. Lawrie will be Chairman of the Board for Perspecta, but the CEO is coming from Vencore.

 

So Lawrie will not be spending more time at Perspecta? 

 

On the flip side, if Lawrie wanted to still be in charge, why spin?  I suppose the thesis might be that he stands to make a lot more money as the two entities grow side-by-side?

 

These Gov't IT service providers (BAH, CACI, LDOS, etc.) trade at much higher multiples (18-19x earnings / 11x EBITDA) relative to legacy DXC/CSC (10x / 6x)...

 

Lawrie made this exact move in the past when he spun CSRA out of CSC... The guy has created a lot of value over the past decade...

 

Booz trades at 1x sales with ~5% net margins; SAIC trades at .76x sales with 4% net margins; Leidos trades at .89x sales with 4% net margin; CACI trades at .94x sales with a 6.6% net margin.

 

It seems a little unclear what fiscal year 19 is without the first Q or K?  Assuming we are in fiscal 19, Perspecta is guiding to $4.2B. 

 

Without doing a ton more diligence here but using the lowest multiple to sales of the comps above, $3.2B would be an appropriate market cap and using the highest would yield a $4.2B market cap...pretty big difference, though one should note that Booz's EBITDA margins (~10 %) are 33% less than Perspecta's. 

 

Is Perspecta worth 33% more than whatever that multiple might be?  I would think Perspecta should at least trade in line w/Booz given the former's size and margins?

 

Booz trades at 17x cash from operations and 21x gaap net income; SAIC trades at 16x cash from ops and 20x gaap net income;  Leidos trades at 17x cash from ops and 23x gaap net income; CACI trades at 13x cash from ops and 14x gaap net income. 

 

Averaging these we find 16x cash from ops and 20x gaap net income multiples.  It's likely that should Perspecta keep its Navy contract, which appears to be a reasonable assumption, we should see PRSP trade at least on average...0.9x sales reads ~$3.8B before factoring any sales growth or substantively greater margin than peers. 

 

Is this not interesting that to anyone else?

 

Perspecta's big Navy contract is being split into two pieces, hardware and services. My guess is that Perspecta will win at least one of the pieces, as they have had the contract for many years. There's a good chance though, that it won't win both pieces. The good news is that the current contract is very likely to be extended through 5/2020, if not longer.

 

There's been lots of consolidation in the government services IT space in the last few years. I see this as a positive, as it means less competitors for each available contract.

 

 

[walkie518]

Even if they lose half of the contract, they appear to be working on other deals. 

 

My hunch is that given the world in which we live, the nature of "warfare," and our current leader's stance, wouldn't it make more sense for more protection? 

 

Shouldn't increased military budgets contribute to greater revenues into the business as there are more users, etc?

 

Likely we'll see the market begin to appreciate after the first statements are released...

 

 

[Foreign Tuffett]

So far this has been exhibiting classic spin off trading dynamics (down by several percent nearly every trading day). Down 20% in the first month of trading! I think it's a decent bet here, but certainly isn't a generational buying opportunity or anything spectacular.

 

I really like the Vencore part of the business due to its longgg tenured relationships with the intelligence community and awesome return on tangible assets. Keypoint looks good too, although it runs the risk of being "Edward Snowden-ed", like USIS was. USPS, which is the largest part of the business, looks OK but not great. I'm not digging the capitalized leases, which look like "hidden" capex. USPS will presumably benefit from being part of a company almost entirely focused on the public sector market.

 

The overall package looks good enough to take a flier on: solid business + tailwind from fed government IT spending as it attempts to modernize outdated systems + discount to peers + fed government's history of being fairly generous with its big contractors + Lawrie as Board Chairman to provide adult supervision and prevent capital allocation missteps.

 

Here's a good overview:

 

http://clarkstreetvalue.blogspot.com/2018/06/perspecta-dxc-government-services-spin.html

 

[walkie518]

thanks for sharing the article

 

not a bad write-up and not too far from what we've discussed

 

certainly some level of speculation buying this stock, but it appears to be a fairly safe

 

I, too, believe this is mostly forced selling and buying shares in the low $20s will, more likely than not, be rewarded in short time