Valuation: Affiliated Computer Services, Inc. (ACS)
Company Review: Affiliated Computer Services, Inc. (ACS)
Company Profile: Affiliated Computer Services Inc. (obtained via Google Finance)
Affiliated Computer Services, Inc., incorporated on June 8, 1988, provides business process outsourcing and information technology services to commercial and government clients. The Company has two segments based on the clients it serves: commercial and government. The commercial segment accounted for approximately 60% of its revenues during the fiscal year ended June 30, 2007 (fiscal 2007). The Company provides services to a variety of clients worldwide, including healthcare providers and payers, manufacturers, retailers, wholesale distributors, utilities, entertainment companies, higher education institutions, financial institutions, insurance and transportation companies. During fiscal 2007, revenues from the government segment accounted for approximately 40% of the Company’s revenues. The Government segment includes its relationship with the United States Department of Education (the Department of Education), for which it services federal student loans, including their Direct Student Loan program in fiscal year 2007, and is the Company’s largest single client.
Business and Management Review
1) Is the business simple and understandable?
This is an understandable business since most of its revenue comes from providing business process outsourcing (BPO) and information technology (IT) services worldwide to commercial (60% of revenues) and government (40% of revenues) clients.
2) Does the business have a consistent operating history?
As a FORTUNE 500 company, and recognized as one of the best performing IT companies, ACS has proven success delivering strategic value, business results, and operational gains to their clients. By skimming through the Income Statement we can find that the company’s Net Income has been decreasing for the past 3 years due to the high operating expenses that, on the other hand, has generated a great amount of revenue for this company. This decrease in Net Income may be over come by the expected grow in demand and the acquisition of Primax Recoveries, Inc. a healthcare cost recovery firm, in 2006.
3) Does the system have favorable long term prospects?
ACS is a rapidly growing company supporting operations reaching more than 100 countries with nearly $6 billion in annual revenues. Last year they made a great move by acquiring Primax Recoveries, Inc., a healthcare cost recovery firm, which will help ACS have a positive growth in the upcoming years.
4) Is management rationale?
Management has been rationale as they had ran its finances in a positive matter. They way the management is expanding its operations and making great acquisitions may play a big role in the positive growth of ACS.
5) Is management candid with its shareholders?
The company is candid to their investors by having valuable information available to them.
6) Does management resist the institutional imperative?
By focusing on the company’s performance, we doubt that management is following the institutional imperative.
Financial and Value Review
1) Size of firm
This firm has a Market Cap lower than two billion, therefore it fails the test. “Fail”
2) Strong financial condition
ACS fails this test as it current ratio is lower than 2. “Fail”
3) Earnings stability
They have a positive net income for the prior ten years. “Pass”
4) Dividend record
They had not constantly paid dividends for the past 10 years. “Fail”
5) Earnings growth
ACS has an increased of 1/3 in EPS for the past 10 years. “Pass”
6) Price to earnings analysis
The company PE ratio is lower than 20, so this test pass. “Pass”.
7) Price to book analysis
Its PB ratio is 2.41 which is lower than 2.5, meaning that this test passes. Additionally, their PB*PE Ratio is lower than 50 that will indicate that ACS passes this test as well. “Pass”,”Pass”.
As the company passes five of the eight Defensive Tests we do not believe Affiliated Computer Services Inc. is appropriate for Defensive Investors.
1) Strong financial condition
Its current ratio is higher than 1.5, but its debt to NCA is not lower than 1.1. “Pass” ”Fails”
2) Earnings stability
ACS has positive net income for five previews years. “Pass”.
3) Dividend record
The company is currently paying dividends. “Pass”.
4) Earnings growth
They had not have earnings growth the five prior years. “Fail”
This firm price is less than 150% of net tangible assets. “Pass”.
As Affiliated Computer Services, Inc. passes 4 of the 6 categories, we do not recommend Enterprising Investors to hold this company.
We find that Affiliated Computer Services’ fair market value to be $51.19.
Since the company is currently trading near to $51, we feel that this company is fairly value but we do not believe that ACS is a good fit for Enterprising and Defensive Investors.
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