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A SPECIAL ANNEX NEWSFLASH

Updated 11/16/04, 9:45AM MST (adds "Fog Finally Lifts, Landscape Barren")

EDS Delays Third Quarter Earnings Release - Again!

Jordan's Swan Song?

Unusual Stock Trading Patterns Before and After Delays

PHOENIX, Nov 5 - The unprecedented second "no news" Electronic Data Systems (EDS) third quarter non-announcement is old news by now.  Amazingly, the EDS stock is up, happily trading in the $20+ range as if nothing had happened.  Which is technically true.  Nothing of substance has happened.  But trouble seems to be brewing under the surface...  

"Do you see any connection between EDS and (President) Bush?" one reporter asked this writer the evening the second delay was announced (Nov 3).  It was the day Bush was basking in victory while EDS was masking its woes.

"Not really," I replied.  "There was perhaps a tenuous connection when Jim Baker sat on EDS' Board.  But that's ancient history now.  Besides, Bush won today, while EDS (stock) has already lost five points."

"But I do see some similarities between Michael Jordan (EDS CEO) and Bill Clinton," I added, speaking tongue and cheek. "Have you seen that the Board has now appointed an independent counsel to help the auditors investigate the accounting mess?"

The reporter laughed.  

"So this may be Jordan's Swan Song." (I was not talking about Bob Swan, the EDS CFO, singing praises to his boss).  :-) "This is the first tangible sign that the Board may be losing confidence in EDS leadership and is stepping in to clean up the mess."

If so, it's about time.  For, EDS' amateurish and unprofessional behavior will not only hurt its credibility among investors and creditors, but also with its major customers.  If a company cannot do something as basic as crank out its financial statements every three months, how can it be expected to perform for an outsourcing client over a 10-year contract?  Especially in competition with such formidable rivals as IBM, Accenture or HP who don't miss a beat?

Those are the kinds of questions that the EDS sales people will have to start answering from now on, even if prospective customers do invite them to bid - something that's far from certain.  And sales, or more accurately lack thereof, has been EDS' biggest weakness (see the charts).

Even before the embarrassing delays, the new contract sales in the third quarter were only $3.3 billion, down from $3.4 billion a year ago, and up only 10% from the disastrous third quarter of 2002 that eventually led to the dismissal of the former chairman and CEO, Dick Brown (see EDS Issues Earnings Warning, Sep 18, 2002).  For the first nine months, EDS new contract sales are up 15% from last year's disappointing totals, but they are down 31% from the first nine months of 2002.

No wonder some EDS executives and employees are clamoring for Dick Brown to come back, according to some sources close to the company.

Maybe that's also because the once proud EDS has now also become the butt of jokes around the industry.  One columnist (George Mannes, TheStreet.com), for example, compared EDS to Julia Roberts in the movie "Runaway Bride" (see "Oops... They Did It Again,"):

"We've just found Julia's Wall Street counterpart: computer services company EDS...  At 4:42 pm Oct. 25 -- that would be about 18 minutes before the ceremony was to begin -- EDS got cold feet..."

"Once Wednesday evening rolled around -- this time, 54 minutes before the conference call was slated to begin -- the company backed out again... Yes, EDS has always struck us as a promising company. Let's just hope they can stop promising and start delivering."

But the fact that Fitch Ratings announced yesterday (Nov 4) that it may cut EDS senior unsecured debt rating to junk, something that Moody's has already done (see Moody's Lowers the Boon on EDS, July 2004), is no laughing matter.

Unusual Stock Trading Patterns 

Given the abundance of bad news about the company, the only thing more amazing than the unprecedented earnings delays is that the EDS stock is still up there in the $20+ range.  The only explanation we have is that a high percentage of EDS shares is held by relatively few big Wall Street players (see EDS: On a Wink and a Prayer, Apr 2004).  Which means that they can more easily manipulate the stock than would be the case with some more widely held equities.  

Beyond that, we are as baffled as any of our clients and the media who have asked us to explain the reasons the EDS stock seems impervious to the incompetence and poor performance of its management.  

"Who knows... maybe Michael Jordan has a large stack of 'free get out of jail' (Monopoly) cards from his Wall Street friends?" we joked with some reporters.  Maybe "Teflon Don" should read "Teflon Mike" now? :-)

Jokes aside, perhaps the independent counsel investigation should not be the only one.  Maybe the SEC or Mark Spitzer should take a look at the unusual trading patterns before and after the Nov 3 EDS delay announcement.

Consider the above charts.  The one on the left shows the EDS vs. Dow Jones trading curves on Nov 3, the day before the EDS announcement.  The one on the right is for Nov 4, the day after the announcement. The EDS stock was down 2.4% to $20.65 on a day the Dow went through the roof (up over 100 points because of Bush's victory), even though there was no publicly disclosed EDS news whatsoever during the day on Nov 3.  Particularly suspicious seems to us seems the steep drop in the stock price around 10AM, amid rising volume.

Who were these sellers and what did they know the morning of Nov 3 that the rest of us didn't?  

Then EDS announces the second delay within minutes after the market closes on Nov 3.  The stock drops 4.89% in after-hours trading to $19.64, before the big EDS holders had a chance to intervene.  The next morning, EDS bounces back up, just as it did after the first earnings delay on Oct 25, outpacing the Dow Jones average by quite a margin (Nov 4 - see the chart on the right).

Who has the power to manipulate the EDS stock like that and how did they do it on Oct 26 and again on Nov 4?

That's another question the SEC and/or the New York Attorney General may want to ask and seek to answer if they are to protect the public shareholders from possible (ab)uses of inside information.  Should the authorities decide to start poking at the EDS stock trades, perhaps some other "Martha Stewarts" may emerge.

For, if there is one immutable and irrefutable rule on Wall Street, it is: "What goes up, must come down."  So it's just a matter of time before the full truth comes out, and the EDS deck of "free get out of jail" cards is depleted, just as Enron's luck eventually ran out.  

EDS Seeks Five-Day Extension from SEC 

PHOENIX, Nov 10 - In another sign of continued strife with its auditors (KPMG), EDS has asked the Securities and Exchange Commission (SEC) for a five-day extension on filing of its third quarter 10Q report.  

The company said it needed additional time to determine the size of a charge to earnings stemming from the troubled contract with the Navy.  EDS has about $700 million in assets tied up in the deal that has already cost the company about $2 billion in operating losses.  EDS and KPMG are also discussing the handling of executive bonus accruals, the company said in its SEC filing.

And how did the stock react to the news?  Well, you'' guess right if you go against your instincts... 

EDS stock is up, as it has been every day since it announced its second earnings release delay (Nov 3 - see the chart).  

"The worse the news; the better," seems to be the stock market's message.  EDS investors and traders seem to have an excuse card for every misstep.  And such a contrarian logic is something the SEC may also find worth investigating, in addition to insider trading that may have taken place prior to the two announcement delays.

Fog Finally Lifts, Landscape Barren 

PHOENIX, Nov 16 - The fog has finally lifted on EDS's third quarter financial results.  And the landscape it revealed is pretty barren.  The company had a net loss of $153 million in the quarter after a $375 million charge related to its troubled Navy contract.  Revenues were down 4%.  Cash flow was down 51%.  New contract sales were down 3% as reported, but were shown by EDS as being up 4% after an adjustment to the 3Q03 year total.

Drilling down a bit further, we find that EDS business troubles are much wider and deeper than the Navy and the airlines sector - the two well known problem areas.  Revenues were down in six of nine industries in which the company does business.  The drop in health care, for example, was particularly precipitous (down 23%).  The manufacturing sector was also down in double digits (-12%), led by a 14% drop in GM revenues (see the EDS chart).

Revenues in Europe (EMEA) dropped by 10%, while the business in the Americas (mostly the U.S.) declined by 4%.  These two geographic regions account for about 92% of the company's revenues.  Only the Asia/Pacific revenues were up (+19%).  Alas, this segment is too small to swing the momentum in the positive direction.

But what EDS lacked in positive facts, the company tried to make up with slick presentation charts.  They were not only aesthetically appealing and color-coordinated; they were obviously put together by a skilled marketing person who guided the EDS executives to put their best foot forward.  They downplayed the negative while emphasizing the positive.

More Unusual Stock Trading Patterns 

But slick marketing alone could not explain another strange trading pattern in EDS stock that emerged after this morning's announcement and teleconference with analysts.

The stock evidently dropped sharply initially, as might befit a troubled company's news of yet another loss, before being pushed up by over two points in heavy trading.  Who are these big buyers of beleaguered shares who miraculously appear on the scene in white knight apparel every time the company stumbles? (for some other examples, see above, and EDS: On a Wink and a Prayer, Apr 2004)).

The white knights' supportive action, and the ensuing rise in the EDS stock price, were in stark contrast to the market (Dow) that dropped more than 50 points this morning (see the chart on the right).  Just another thing for the SEC and New York State authorities to look into.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004 IT: EDS: Jordan's Swan Song? (Nov 2004); To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004) HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

2003 EDS: “Biggest Feather in Cap’s Cap,” (Dec 2003); "Pain without Gain" (Oct 2003), "EDS CEO Replaced" (Mar 2003);  Rebuilding Trust and Confidence (Feb 2003)

2002 EDS: Wall Street Legal Vultures Descend Upon EDS (Sep 27, 2002),  EDS Issues Earnings Warning (Sep 18, 2002),  Wall Street-Main Street Chasm Widens (July 3, 2002),  Analysis of EDS 4Q01 Results (Feb 8, 2002)

A selection from prior years: Annex Research Analysis of EDS 4Q00 Results (Feb 7, 2001),  EDS Takes Over US Navy (Oct. 10, 2000),  EDS Second Quarter Results (July 28, 2000),  Annex Bulletin - 2000-02 (EDS' e-Price Clubs).

Or just click on and use "financial engineering" or similar  keywords.

Volume XX, Annex Newsflash 2004-21
November 5, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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