DXC Technology (DXC, Financial) has entered our Value Leaders rankings as a lesser-known IT services provider. Recently, it was involved in takeover discussions with Apollo (APO, Financial) and Kyndryl (KD, Financial), a company spun off from IBM (IBM, Financial). DXC faced challenges this year, hitting four-year lows in May due to disappointing FY25 guidance with earnings and revenue falling short of expectations.
In February, Raul Fernandez was appointed as the new CEO to initiate a major overhaul. Although Q4 results were not under his control, his strategies are starting to show promise. While takeover talks have cooled, they remain a possibility. Apollo and Kyndryl discussed a potential acquisition at $25.00 per share in June. Fernandez might keep DXC independent or improve operations to enhance shareholder value before considering higher bids.
- Market uncertainty has led to cautious spending by DXC's clients, affecting short-term projects in its Global Business Services (GBS) and Global Infrastructure Services (GIS) segments. This was anticipated in DXC's FY25 outlook, grounding investor expectations. Conditions have improved, leading to slightly raised FY25 guidance in August.
- Fernandez revamped the sales strategy, deploying industry-specific client partners, updating compensation, and enhancing incentives to maximize returns in a challenging demand environment.
- These efforts have shown early success, with an expanded pipeline driven by new deals in DXC's largest segment. While these deals may not boost near-term revenue, they strengthen DXC's long-term prospects.
- DXC's insurance software business remains stagnant in revenue growth but is lucrative, generating over $1 billion annually and serving 21 of the top 25 global insurance carriers. DXC is exploring strategic opportunities within this segment, making a total takeover less likely in the short term.
Operating in a dynamic market, DXC may experience short-term volatility, especially with potential M&A announcements. However, buy-and-hold investors might witness a broader turnaround, as recent quarters show encouraging signs. The stock trades at an attractive 7x forward earnings valuation. A stop-loss limit of 15-20% is recommended.
