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DXC Technology Falls 11.8%, Despite Strong Earnings

Shares of DXC Technology (DXC) closed 11.8% lower on Tuesday, after Tien Tsin Huang of J.P. Morgan turned bearish on the stock. Huang downgraded DXC Technology to Sell from Hold. However, his price target of $45 reflects 22.3% upside potential. 

Despite the sharp decline, shares of this B2B (business-to-business) information technology services provider are up about 43% on a year-to-date basis. (See DXC Technology stock charts on TipRanks) 

Revenue stabilization, sequential margin expansion, and strong book-to-bill ratio drove DXC Technology stock higher in 2021. During the most recent quarter, DXC Technology delivered revenues of $4.14 billion, which handily exceeded management’s and the Street’s expectations. However, that number represents an 8.02% decline year-over-year. Its bookings stood at $4.6 billion, while the book-to-bill ratio was 1.12 (representing the fifth straight quarter where it was above 1.0) 

DXC Technology delivered adjusted earnings of $0.84 a share compared to $0.21 in the prior-year period. Furthermore, its earnings came well ahead of the Street’s estimate of $0.75. The outperformance reflects margin expansion, lower interest rates, and a decline in tax. 

While DXC Technology’s Q1 numbers mostly impressed, its negative free cash flow (FCF) of $304 million didn’t sit well with Huang. This is important as softness in free cash flows could limit investments in the company’s growth initiatives.  

Earlier, Bryan Keane of Deutsche Bank said that DXC Technology’s Q1 FCF came below expectations on account of the conclusion of a “longstanding inefficient take-or-pay contract.” Keane also highlighted difficult year-over-year comparisons for bookings. 

Nevertheless, Keane maintained his Buy rating on the stock with a price target of $53 (44% upside potential). 

On TipRanks, DXC Technology is a Moderate Buy based on 6 Buys, 2 Holds, and 1 Sell. The average DXC Technology price target of $45 implies approximately 22.3% upside potential to current levels.

However, However, TipRanks’ Stock Investors tool shows that investors currently have a Very Negative stance on DXC Technology stock, with 26.2% of investors who hold portfolios on TipRanks having decreased their exposure in the last 30 days.

Investors might have decided to sell their DXC stock because its Q2 adjusted EPS outlook of $0.80 – $0.84 fell short of the consensus estimate of $0.85, or because its revenue declined year-over-year. It’s also possible that they are apprehensive about the company’s bookings and cash flow, in line with the analysts’ concerns mentioned above.

Disclosure: Amit Singh held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.