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Favorite Stock: ACS
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November 29, 2001: 1:41 p.m. ET
Technology consultant's strong run is not over, one portfolio manager says.
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NEW YORK (CNN/Money) - It's tough to argue with a stock that's up 55 percent this year. But the question for Affiliated Computer Services is this: Can the gains continue?
John Rutledge, portfolio manager at the Evergreen Technology Fund, is betting they will. Rutledge said the company, which performs information technology outsourcing for governments and companies, should continue to grow profits at a strong and predictable pace, boding well for its share price. Rutledge discussed his favorite stock with CNN/Money.com.
What draws you to Affiliated Computer Services?
The company has a very attractive earnings outlook. Earnings are strong and improving. Many of the company's client contracts are long-term -- spanning three to five years. This means the earnings are mostly reoccurring, giving some assurance that there won't be violent swings in
profitability.
ACS (ACS: Research, Estimates) benefits from a growing trend in corporate America to outsource its data processing needs such as health care claims.
Twenty-five percent of its revenue come from the federal government. Other clients include American Express (AXP: Research, Estimates), Blue Cross, United Healthcare, New York State, the Department of Education, NASA and Washington State.
Who are its competitors and what makes it a 'winner' in the sector?
ACS is in the business-processing outsourcing sector. We like this
sector in general given the overall trend of corporations to outsource more and more processing functions to outside vendors. ACS stands out as our favorite. Other competitors include IBM (IBM: up $0.49 to $112.64, Research, Estimates) Global Services, EDS (EDS: down $2.15 to $67.65, Research, Estimates) and CSC.
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John Rutledge | |
ACS's management is young, aggressive, and capable. They've been fairly acquisitive over the last several years, buying small privately
held companies. Through the successful integration of these acquisitions,
management has demonstrated that they can execute well.
Acquisitions have added probably 5 percent to earnings growth. ACS has grown its business with current clients by approximately 12-15 percent annually so in total they are growing earnings at about a 20 percent clip.
How is the sector doing?
ACS and its peers are doing well. This year this stock has moved from $35 to $90. But its relative (price-to-earnings ratio) is 0.9, which means that ACS sells at a discount to the market. This is one of the few attractive technology companies out there today.
What are your expectations for the stock?
We think the company will continue to deliver at least 20 percent annual earnings growth. There is a lot of opportunity for consolidation in this industry and ACS' market share, though one of the largest, is still relatively small -- and, thus, ACS should be a consolidator.
Comment on its long-term growth potential.
The earnings outlook looks strong. ACS earned 77 cents a share in the September quarter, a penny better than expected, and up from 57 cents per share in the year-ago quarter. Guidance remains positive
going forward. So how can anyone not like a stock like this?
For (the latest fiscal year) they earned $2.46 per share. They are projected to earn $3.50 a share for (next year) and $4.23 (the following year). The company is widely followed -- more than 15 brokers have coverage of the stock, which means there is less chance for a huge unpleasant surprise. It's a beautiful story. It is a wonderful stock. It represents 10 percent of the Evergreen Technology Fund.
Any risks unique to the stock?
We believe the risks are low because of its long-term contracts. Any time a company makes acquisitions there are execution risks involved. However, with ACS the acquisitions are small, and, thus, the risks are relatively small. We believe that the company will continue to execute well over time.
What is your financial interest in the stock?
I don't own this in my personal account but I am a shareholder of the
Evergreen Technology Fund, which does own the stock.
Any final thoughts?
We might consider selling ACS when and if it moved up to a relative (price-to-earnings ratio) of 1.5 times the market. Of course we have quite a ways to go before the stock reaches those levels. 
* Disclaimer
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